What are Stablecoins? USDT, USDC, and DAI

Crypto is volatile. Bitcoin can drop 15% in a day. Ethereum has crashed 80% in a bear market. If you're a trader who just took profit on a position, you don't want to sit in BTC while you decide your next move — you want somewhere to park value without worrying about a 3 AM flash crash. And if you're sending money across a border, you don't want the amount to swing 5% between hitting "send" and the recipient cashing out.

Stablecoins solve this. They're crypto tokens engineered to hold a steady value by being pegged to a stable reference — almost always the U.S. dollar. One USDT is designed to equal one dollar. One USDC is designed to equal one dollar. You get the speed, openness, and global reach of a blockchain token, but with the price stability of fiat. The catch is that how each stablecoin holds its peg varies dramatically — and that variation is exactly where the risk hides.

As of early 2025, the total stablecoin market capitalization exceeds $150 billion, with USDT alone above $110 billion. On a good day, stablecoins settle more value on-chain than Visa processes globally — not because people are buying coffee with USDC, but because traders, DeFi protocols, and cross-border payment rails have made stablecoins the default unit of account for the entire crypto economy. When a market is priced "in dollars" on-chain, those dollars are almost always a stablecoin.

A peg is a promise: one token should always be worth one dollar. But a stablecoin trades on open markets where supply and demand set the price tick by tick. Nobody can simply declare the price is $1.00. So what keeps a stablecoin glued to its peg when millions of people are buying and selling it?

The answer, for every well-designed stablecoin, is arbitrage — the profit motive of traders doing the protocol's job for it.

• If the token trades below $1 (say $0.98), arbitrageurs buy it cheap on the open market and redeem it with the issuer for a full $1.00, pocketing two cents. That buying pressure pushes the price back up, and the redemptions shrink supply — both forces drive it toward $1.
• If the token trades above $1 (say $1.02), arbitrageurs deposit $1.00 with the issuer to mint a fresh token, then sell it on the market for $1.02. That selling pressure pushes the price back down, and the new supply absorbs demand.

This is the quiet engine under every stablecoin. The peg isn't held by magic or by the issuer manually intervening — it's held by thousands of self-interested traders who make free money any time the price drifts. A stablecoin's peg is only as strong as the arbitrage loop behind it. When that loop breaks — because redemptions are frozen, reserves are unreachable, or the collateral itself is collapsing — the peg breaks with it.

The simplest design is also the dominant one. A fiat-backed (or fiat-collateralized) stablecoin is an IOU: for every token in circulation, the issuer claims to hold one real dollar — or a dollar's worth of cash-equivalent assets like short-term U.S. Treasury bills — in reserve. Deposit dollars, the issuer mints tokens. Redeem tokens, the issuer burns them and returns dollars. The peg is defended by the promise that you can always redeem 1:1.

Tether (USDT) is the oldest and largest stablecoin. For every USDT, Tether Holdings claims to hold equivalent reserves — primarily U.S. Treasury bills, overnight reverse repurchase agreements, and cash. Its quarterly reserve attestations show a portfolio heavily weighted toward short-duration government debt, and the market has trusted that claim through multiple crises. But Tether has never submitted to a full independent audit — only attestations from accounting firm BDO Italia. That distinction matters: an attestation confirms a snapshot on one day; an audit examines the process and controls that produce the numbers every day. With $110B+ in circulation, that gap is the single most-debated question in the stablecoin world.

USD Coin (USDC), issued by Circle, takes the more conservative, regulation-forward path: cash and short-dated U.S. Treasuries held at regulated financial institutions, with monthly reserve reports. Its track record is strong — with one famous scare. In March 2023, USDC briefly depegged to $0.87 after Silicon Valley Bank, where Circle held $3.3 billion in reserves, collapsed. The peg recovered within 48 hours once U.S. regulators guaranteed SVB deposits. Those 48 hours taught the whole market a lesson: even a "safe," fully-reserved stablecoin inherits the counterparty risk of the banks holding its cash. Fiat-backing doesn't remove risk — it relocates it into the traditional financial system.

From a user's seat, USDT and USDC feel identical — dollar-denominated tokens that move across many chains in seconds. The difference lives beneath the surface, in reserve quality, transparency, and which institutions can freeze or fail.

DAI takes a radically different path — no bank, no issuer holding your dollars. A crypto-backed stablecoin is backed by other crypto assets locked in transparent smart contracts you can inspect on-chain. With DAI, you deposit ETH (or other approved collateral) into a MakerDAO vault and mint DAI against it — but only up to a fraction of the collateral's value. Deposit $150 of ETH, mint up to $100 of DAI. That 150% floor is the safety margin, and it has to exist for one reason: the collateral itself is volatile.

Here's the elegant part. If your collateral's value falls toward the minimum ratio, the protocol automatically liquidates your position — selling your ETH (typically at a discount, via keeper bots) to repay the DAI debt before the backing can go underwater. No human approves it; the smart contract just executes. This kept DAI stable through the March 2020 crash, when ETH fell 43% in a single day, and through the entire 2022 bear market. The peg, again, is defended by arbitrage: anyone can buy under-$1 DAI and use it to repay debt for $1 of collateral back, or mint and sell DAI when it trades above $1.

The trade-off is brutal capital inefficiency. Locking $150 to create $100 of stablecoin means a third of your capital sits idle as a cushion. That's the price of decentralization without a trusted issuer. There are sharper edges, too: in violent crashes, mass liquidations can pile selling pressure onto the very asset being liquidated, and on a congested chain liquidations can lag — exactly what stressed MakerDAO during "Black Thursday" in 2020. MakerDAO has since softened these issues by accepting USDC as collateral (ironic — a "decentralized" stablecoin partly backed by a centralized one) and by onboarding real-world assets like U.S. Treasuries. Every fix trades a little decentralization for a little stability. That tension never fully goes away.

The third family promises the dream: a stablecoin with no collateral at all, holding its peg purely through code that expands and contracts supply. Algorithmic stablecoins are the most capital-efficient design imaginable — and the most fragile. The cautionary tale is also the most expensive in crypto history.

On May 7, 2022, the algorithmic stablecoin UST (TerraUSD) began slipping off its dollar peg. By May 12 it was worth $0.10. Its companion token LUNA collapsed from $80 to fractions of a penny. Combined market-cap destruction: over $40 billion. Life savings vaporized. Suicide-hotline posts pinned across crypto forums. An $18B stablecoin went to zero.

UST's mechanism was a swap, not a vault: if UST dropped below $1, you could always burn it for $1 worth of newly minted LUNA, and the arbitrage was supposed to restore the peg. It works beautifully — until everyone heads for the exit at once. In a bank-run scenario, mass UST burns flood the market with brand-new LUNA, crashing LUNA's price, which destroys confidence in UST, which triggers more burns, which mints even more LUNA. This is the death spiral: a reflexive feedback loop that, once it gains momentum, is impossible to stop because every step makes the next step worse.

The most uncomfortable truth is that UST was not a black swan. The vulnerability was publicly documented for years, and an almost identical mechanism had already blown up Iron Finance in June 2021. But the Anchor protocol was paying 19.5% APY on UST deposits, and a yield that good has a way of making smart people forget what backs their money. Nothing did.

"Stable" is a goal, not a guarantee. Every stablecoin can lose its peg, but each type breaks in a characteristic way. Knowing the failure mode tells you what to watch for.

• Reserve risk (fiat-backed). The peg is only as real as the reserves and your ability to redeem them. If reserves are overstated, illiquid, or stuck in a failing bank — as Circle's were at SVB — redemption stalls and the peg cracks. This is why audit quality and reserve composition matter more than the logo on the coin.
• Liquidity & redemption risk. A coin can be "fully backed" on paper and still depeg if it can't redeem fast enough. When a wave of redemptions hits and the liquid reserves run dry before the slow-to-sell assets can be converted, holders panic and dump on the open market below $1.
• Collateral risk (crypto-backed). Overcollateralization only protects you if the collateral stays liquid and the liquidation engine keeps up. A fast crash plus a congested chain can let positions go underwater before they're closed, leaving DAI temporarily under-backed.
• Death-spiral risk (algorithmic). The deadliest of all, because the mechanism that defends the peg in calm markets accelerates the collapse in panicked ones. There is no external collateral to redeem against — only reflexive faith.
• Smart-contract & regulatory risk (all types). A bug in the minting contract can break a decentralized stablecoin overnight. And regulators can freeze a centralized issuer's bank accounts, or blacklist specific addresses — both USDT and USDC can and do freeze tokens at law-enforcement request. "Censorship-resistant money" this is not.

The practical defense is diversification of risk type, not just of ticker. Holding USDT and USDC together hedges issuer-specific problems but leaves you fully exposed to the U.S. banking system both depend on. Adding a robust crypto-backed coin like DAI hedges a different risk at the cost of capital efficiency. There is no perfectly safe stablecoin — only an informed choice about which risks you're comfortable carrying.

On GaiaEx, USDC and USDT are the primary quote currencies for spot and perpetual markets — virtually every trading pair is priced against one of them. When you take profit on a BTC position, you're receiving stablecoins straight into your non-custodial wallet: no conversion to fiat, no bank wire, no multi-day settlement window. You're "in dollars" the instant the trade fills, and those dollars are yours to redeploy, withdraw, or hold across any chain GaiaEx supports.

The recurring decision is which stablecoin to hold between trades. USDT offers the deepest global liquidity, so it's often the cheapest to move in and out of size. USDC offers stronger auditing and tighter U.S. regulatory alignment, which some traders value more than raw liquidity. A common, sensible approach is to split idle capital across both — diversifying issuer risk — while remembering that they share the same underlying exposure to the traditional banking system, as the SVB episode made vivid.

Because GaiaEx settles on Hyperliquid L1 and secures your keys with MPC, the stablecoins you hold stay in your custody, not on a company's balance sheet. That removes the FTX-style risk of an exchange quietly lending out your "dollars." What it does not remove is the issuer risk baked into the stablecoin itself — so the discipline still applies: know what backs the coin, and never assume "stable" means "risk-free." Both USDT and USDC are dramatically safer than any algorithmic alternative, but neither is a Treasury bill.