If you've spent any time in crypto, you've seen the letters USDT, USDC, or DAI next to a price that barely moves. Designed to stay near one dollar. It's the most boring price chart in crypto — and that's exactly the point.
But here's the thing: keeping a digital token pegged to $1 is harder than it looks. Different stablecoins use completely different mechanisms to stay there. Some are backed by cash, Treasury bills, money-market instruments, or similar reserve assets. Others lock up crypto as collateral. A few have tried to rely purely on code and incentives — with mixed results.
Let's break down how three of the best-known stablecoins actually keep their peg, why they sometimes wobble, and what that means if you're using them.
What Is a Stablecoin, Really?
A stablecoin is a cryptocurrency designed to maintain a stable value — typically $1 per token. Unlike Bitcoin or Ethereum, which can move sharply in a single day, a stablecoin should feel more like digital cash.
The "how" depends on what backs it. There are three main approaches:
- Fiat-collateralized — real dollars (or equivalents) held in reserve
- Crypto-collateralized — other cryptocurrencies locked as collateral
- Algorithmic or hybrid — code, incentives, and sometimes partial collateral
Each has trade-offs in trust, decentralization, and resilience.
USDT (Tether) — The Fiat-Collateralized Giant
Tether is one of the oldest major stablecoins and remains the largest by market capitalization. As of mid-2026, its market cap leads the category by a wide margin.
How it works: For every USDT in circulation, Tether Limited claims to hold an equivalent amount of reserves — mostly cash, cash equivalents, and other assets. When you want to redeem USDT for dollars, you go through Tether's platform, and eligible institutional or verified users can redeem for fiat.
The peg mechanism: Arbitrage. If USDT trades below $1 on an exchange, traders buy cheap USDT and redeem it with Tether for $1, pocketing the difference — though for most retail users, arbitrage happens through secondary-market liquidity rather than direct redemption. That buying pressure pushes the price back up. If it trades above $1, traders mint new USDT (by depositing dollars) and sell it on exchanges, pushing the price down.
Where it can break: The peg depends on trust in Tether's reserves. If market participants doubt the reserves or redemption access, they may demand a discount in secondary markets, while direct redemption is limited to eligible Tether customers. This happened during market stress in May 2022, when USDT briefly traded materially below $1 on some exchanges (CNBC report).
Key consideration: Tether settled with the New York Attorney General in 2021 and has faced ongoing regulatory scrutiny over its reserves in multiple jurisdictions. It is not "unregulated," but its reserve composition has been a subject of debate.
USDC (USD Coin) — The Regulated Alternative
USDC was launched by Centre, a consortium founded by Circle and Coinbase, and is now issued by Circle with a focus on transparency and regulatory compliance.
How it works: Same broad fiat-backed model, with reserves mainly in cash and short-duration U.S. government money-market assets. Circle says most USDC reserves are held in the Circle Reserve Fund, an SEC-registered 2a-7 government money market fund that can hold cash, short-dated U.S. Treasuries, and overnight Treasury repos, with the rest held as cash at banks. The key difference is that Circle publishes regular attestations from a third-party accounting firm, and USDC is issued under state money transmitter licenses in the U.S.
The peg mechanism: Same arbitrage loop as USDT. But because Circle has historically been more transparent about reserves, USDC tends to trade closer to $1 during calm markets.
Where it can break: In March 2023, USDC briefly de-pegged to around $0.87 after Circle disclosed that $3.3 billion of its reserves were stuck at Silicon Valley Bank during its collapse (Circle press release). The peg recovered within days after U.S. regulators announced that SVB depositors would be made whole — but it showed that even "safe" stablecoins face bank-level risk.
Key consideration: Circle's issuance and redemption infrastructure is subject to compliance obligations such as AML/KYC for supported direct users; ordinary on-chain transfers may depend on the platform or wallet involved. Circle's licenses and reporting obligations also vary by state.
DAI — The Multi-Collateral Stablecoin
DAI is a decentralized stablecoin issued by the Maker/Sky protocol — protocol-issued rather than coming from a traditional stablecoin company, but its collateral set can include centralized stablecoins and real-world-asset exposure.
How it works: You can buy DAI on exchanges like other tokens. Historically, new DAI was generated mainly through over-collateralized vaults in the Maker system — you deposit ETH or another approved asset as collateral and generate DAI against it, requiring more collateral value than the DAI you receive. Today the Maker/Sky system also includes mechanisms such as peg modules, centralized stablecoin exposure, and real-world-asset exposure that broaden how DAI (and its successor token USDS) are supported. The exact ratio depends on the vault and collateral type.
The peg mechanism: A combination of arbitrage and interest rates. If DAI trades below $1, users can buy cheap DAI and repay their vault debt at $1 face value — effectively profiting from the discount. The protocol also adjusts a "stability fee" (interest rate on vaults) to influence demand.
Where it can break: During extreme market drops, the crypto collateral backing DAI can lose value rapidly. If many vaults become under-collateralized, the system must liquidate positions — sometimes at a loss. During the March 2020 market crash, DAI traded materially above $1 as demand for "safe" assets surged and the system struggled to keep up.
Key consideration: DAI began as a purely crypto-collateralized stablecoin, but today its approved collateral includes assets such as USDC and real-world-asset exposure within the Maker/Sky ecosystem (Sky Money glossary). Sky now also promotes USDS as the upgraded version of DAI, while DAI still exists and can interact with Sky's conversion and peg modules. It is not "safer" than fiat-backed stablecoins — it has a different set of risks including protocol governance, collateral price volatility, and RWA exposure. For users who prefer a protocol-issued stablecoin over relying on a single fiat issuer, DAI may be an appealing option — but it does not eliminate centralization risks entirely.
What Happens When a Stablecoin Breaks?
A stablecoin "breaking the peg" means it trades significantly above or below $1 on exchanges. For users, this matters:
- If you're holding it as cash: A de-peg means your "dollar" is suddenly worth less. During USDC's March 2023 de-peg, holders who needed to sell immediately took a material loss.
- If you're trading: De-pegs create arbitrage opportunities — but also risk. Exchanges may halt deposits or withdrawals of a de-pegged stablecoin.
- If you're earning yield: Lending protocols like Aave or Compound can become unstable if a stablecoin's price diverges, triggering liquidations.
Some de-pegs are short-lived — minutes to days — while others, such as Terra's UST in 2022, never recovered, wiping out billions.
Which Stablecoin Should You Use?
There's no single "best" stablecoin — it depends on what you're doing:
- USDT is the most widely accepted, especially on centralized exchanges and in markets outside the U.S.
- USDC is widely used across many DeFi protocols and U.S.-regulated platforms, with more transparent reporting.
- DAI may appeal to users who prefer a protocol-issued stablecoin over relying on a single fiat issuer, while accepting the associated governance, collateral, and RWA-related risks.
If you're regularly moving between exchanges or tracking your portfolio, tools like our portfolio rebalancing calculator can help you manage exposure across different stablecoins and assets.
The Bottom Line
Stablecoins are the plumbing of crypto — boring until they break. Understanding how USDT, USDC, and DAI actually maintain their peg helps you know what you're holding and when to worry.
Fiat-backed stablecoins depend on trust in the issuer and the banking system. Crypto-backed stablecoins depend on the stability of their collateral and the soundness of their protocol. Neither is perfect. But for now, they're how most of crypto moves money around.
This article is for informational purposes only and is not financial advice.