USDT, USDC, DAI: Mechanics and Risks
The three biggest stablecoins hold their peg in different ways, so they break in different ways, and knowing how tells you which risk you are actually carrying.
Select a coin to see how it actually behaved when it was tested.
About $3.3 billion of USDC reserves (roughly 8%) sat as deposits at Silicon Valley Bank. When the bank failed and Circle disclosed the exposure, USDC fell to about $0.87 on 11 March 2023 as holders feared a shortfall.
OutcomeIt returned to a dollar within about two days, once US regulators guaranteed the deposits. The dollars were real, they were just briefly stuck.
Even a fully fiat-backed stablecoin can depeg if the bank holding its reserves fails. What separates a bad afternoon from a total loss is whether real, recoverable backing sits underneath.
Compare the three cards above before reading on. All three of these tokens are worth a dollar, and all three promise to stay there, but they keep that promise in completely different ways. USDT and USDC hold real dollars and short-term government debt in reserve. DAI holds a pile of volatile crypto locked in code. That difference is not a detail. It decides who you are trusting (a company and its banks, or a set of smart contracts), how the peg can break, and whether a break is a bad afternoon or a total loss. This module walks through each token, then the one real-world case where a fully-backed stablecoin still slipped, so you can read any stablecoin by its plumbing instead of its logo.
USDT (Tether): the biggest, and the least transparent
USDT is the largest stablecoin in circulation, and Tether says every token is backed one-for-one by reserves. Over the years those reserves have shifted heavily toward US Treasury bills plus cash and some other assets.
The long-running argument is about proof. Tether publishes attestations, a point-in-time snapshot checked by an accounting firm, rather than a full ongoing audit. That distinction matters more than it sounds (see the fold below). In 2021 Tether settled with the US Commodity Futures Trading Commission for a $41 million penalty over past statements that its reserves fully backed the token at all times. It now publishes regular reserve reports, but for a holder the takeaway is simple: an attestation is weaker assurance than an audit, and where the reserves sit and how quickly they could be sold still matters.
USDC (Circle): the compliance-first option
USDC is positioned as the transparent, regulation-friendly choice. Its reserves are held in cash and short-dated US Treasuries, it reports on them regularly, and Circle has actively pursued regulatory approval in major markets.
That posture makes USDC the token most exchanges and institutions reach for when they want the cleanest regulatory story. But "cleaner" is not "risk-free", and the next section is the proof.
The March 2023 USDC depeg: a real dollar in a failed bank
In March 2023, about $3.3 billion of USDC's reserves (roughly 8% of the roughly $40 billion backing it) sat as deposits at Silicon Valley Bank. On 10 March 2023, that bank failed.
When Circle disclosed the exposure, USDC broke its peg and fell to about $0.87 on 11 March as holders feared a shortfall. The peg came back once US regulators said all SVB depositors would be made whole and access returned when banks reopened on Monday 13 March. USDC was back at a dollar within about three days.
The lesson is bank counterparty risk. Even a fully fiat-backed stablecoin depends on the banks holding its reserves, and a bank can fail. USDC recovered not because its peg mechanism was clever but because the underlying dollars were real and, in the end, recoverable.
DAI (MakerDAO): backed by crypto, not a bank account
DAI takes a different route entirely. It is decentralised and crypto-collateralised. Users lock collateral (mostly ETH, and, controversially, some centralised stablecoins and real-world assets) into smart-contract vaults and mint DAI against it. The system is always over-collateralised: you might deposit $150 or more of ETH to borrow $100 of DAI.
If the collateral value falls toward the debt, the position is automatically liquidated to keep every DAI backed. The whole system is governed by holders of the MKR token, who vote on which collateral is accepted, the required ratios, and fees. MKR is also a backstop, because new MKR can be minted and sold to recapitalise the system if it ever goes under-collateralised, which is what happened during the March 2020 "Black Thursday" crash. So DAI holds its peg through over-collateralisation, automatic liquidations, and active governance rather than a bank account full of dollars.
Same price, three very different risks
The three tokens sit differently on three axes, and this is the mental model to keep:
- Counterparty risk. With USDT and USDC you trust the issuer and its banks. With DAI you trust smart contracts and the quality of the collateral inside them.
- Regulatory risk. Centralised issuers can freeze or blacklist addresses and must satisfy regulators. DAI is more censorship-resistant, but it is exposed to whatever centralised assets happen to sit in its collateral.
- Transparency risk. USDC is generally the most transparent, USDT has historically been the least, and DAI is fully on-chain but genuinely hard to assess.
And the word that ties it together: a stablecoin depegs when its market price moves meaningfully and persistently away from its target. The usual triggers are doubt about reserves or redeemability, a bank or collateral failure, a liquidity crunch where sellers overwhelm buyers, or, for algorithmic designs, a broken mechanism. A depeg can be temporary (USDC in 2023) or terminal (TerraUSD in 2022). The difference is whether real, recoverable backing exists underneath.
Attestation vs audit, and why the gap matters
These two words get used loosely, but they are not the same level of assurance.
An attestation is a point-in-time snapshot: an accounting firm confirms that on a given date the reserves matched or exceeded the tokens in circulation. It says nothing about the day before or the day after, and it is a narrower exercise than a full examination.
An audit is deeper and ongoing. It tests the controls, the completeness, and whether the reserves were genuinely there and genuinely liquid over a period, not just at one snapshot moment.
For a holder, the practical point is that an attestation showing "100% backed" is weaker evidence than an audit showing the same figure. Two issuers can both report full backing while offering very different confidence that the money is really there and really spendable in a crunch.
Worked example: over-collateralisation and a DAI-style liquidation
Numbers make the mechanism click.
You deposit 1 ETH at $2,000, so your collateral is worth $2,000. The system requires a minimum collateral ratio of 150%, so the most DAI you could mint is 2,000 / 1.5 = about $1,333. You play it safe and mint only $1,000 DAI, a comfortable 200% ratio.
Now ETH falls to $1,400. Your collateral is worth $1,400 against $1,000 of debt, a ratio of 140%, which is below the 150% floor. The vault is automatically liquidated: your ETH is auctioned to repay the $1,000 debt plus a penalty, and DAI stays fully backed the whole way through.
The over-collateralisation is what gave the system room to sell your collateral before the debt could ever exceed it. That buffer is the entire reason a stablecoin backed by volatile crypto can still hold a steady dollar.
Temporary depeg vs terminal depeg
Not every depeg is fatal, and telling the two apart is the useful skill.
A temporary depeg is a scare over access or confidence while real backing still exists. USDC in March 2023 is the textbook case: the dollars were real, they were just briefly stuck, so once access was restored the price snapped back to a dollar within days.
A terminal depeg is a collapse with nothing to redeem against. TerraUSD in May 2022 is the textbook case: its peg rested on a supply mechanism rather than reserves, so when confidence broke there was no real backing to buy the token back, and it never recovered.
The test to apply in the moment: is there real, recoverable backing behind this token, or only a mechanism and market confidence? That single question separates a bad afternoon from a total loss.
Quick knowledge check
What is the difference between an attestation and an audit, and why does it matter for USDT? An attestation confirms reserves at a single point in time; an audit is a deeper, ongoing examination. It matters because an attestation is weaker assurance that the tokens are fully and continuously backed.
Why did USDC depeg in March 2023, and why did it recover? About $3.3 billion of its reserves were stuck at the failed Silicon Valley Bank, so the price fell to about $0.87 on fear of a shortfall. It recovered to a dollar once regulators guaranteed SVB depositors and access was restored.
Why is DAI over-collateralised, and what happens if the collateral falls too far? Because its backing is volatile crypto, users post more collateral than the DAI they mint (for example $150 or more per $100). If the ratio drops below the required floor, the vault is automatically liquidated to keep DAI fully backed.
Sources
- Federal Reserve, FEDS Notes, "The stable in stablecoins", plain definition of a stablecoin and its dollar peg.
- Moin, Sirer and Sekniqi (arXiv:1910.10098), "A Classification Framework for Stablecoin Designs", the three design categories (fiat-collateralised, crypto-collateralised, algorithmic).
- Tether, "Transparency", USDT reserve reporting and periodic attestations.
- CFTC, Press Release 8450-21, the 2021 $41 million Tether settlement over backing claims.
- Circle, "$3.3 Billion of USDC Reserve Risk Removed, Dollar De-peg Closes", the SVB reserve exposure and its resolution.
- CoinDesk, "USDC Stablecoin Regains Dollar Peg After Silicon Valley Bank-Induced Chaos", the drop to about $0.87 and the recovery.
- "Understanding the Maker Protocol" (arXiv:2210.16899), DAI's over-collateralised vault model, MKR governance, and automatic liquidations.