What you need
- Stablecoins Maintain $1 Peg — They're designed for stability, not speculation
- Three Main Types — Fiat-backed (USDT, USDC), Crypto-backed (DAI), Algorithmic (risky)
- USDT Has Most Liquidity — But reserve transparency is questionable
- USDC Most Regulated — Monthly attestations, but can freeze wallets
- DAI Is Decentralized — Can't be frozen, but more complex and lower liquidity
- Depegs Do Happen — UST went to $0, even USDC hit $0.87 briefly
- Diversify Your Stables — Don't put all eggs in one stablecoin basket
What Are Stablecoins?
Stablecoins are cryptocurrencies designed to maintain a stable value — typically pegged 1:1 to the US Dollar. Unlike Bitcoin or Ethereum, they don't go up or down 10% in a day.
Why Do We Need Stablecoins?
- Trading: Park profits without cashing out to fiat (avoid tax events)
- DeFi: Provide liquidity, earn yield, take loans
- Payments: Send "dollars" globally, 24/7, near-instant
- Protection: Hedge against local currency devaluation
Three Types of Stablecoins
Fiat-Backed
Backed 1:1 by USD in bank accounts. USDT, USDC. Most common, most trusted.
Lowest RiskCrypto-Backed
Backed by crypto collateral (ETH, BTC). DAI, LUSD. Over-collateralized for safety.
Medium RiskAlgorithmic
Uses smart contracts to maintain peg. No reserves. UST famously collapsed.
High RiskContrarian Take
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Major Stablecoins Compared
Tether (USDT)
The OG StablecoinPros: Highest liquidity, most trading pairs, never fully depegged despite FUD.
Cons: Reserve composition questioned, no full audit, company based in British Virgin Islands.
USD Coin (USDC)
The Regulated ChoicePros: Monthly attestations by Grant Thornton, reserves in regulated US banks, transparent.
Cons: Can freeze wallets on government request, depegged to $0.87 during SVB crisis.
DAI
The Decentralized DollarPros: Truly decentralized, can't freeze wallets, transparent on-chain collateral, battle-tested.
Cons: Lower liquidity, more complex, some USDC exposure in collateral.
When Stablecoins Break: Depeg Events
Stablecoins can and do lose their $1 peg. Some recover. Some don't.
What happened: Algorithmic stablecoin UST lost peg due to bank run. Luna (backing token) hyperinflated. $40 billion wiped out in days.
Outcome: Complete collapse to near-zero
What happened: Circle had $3.3B stuck in collapsed Silicon Valley Bank. USDC briefly traded at $0.87.
Outcome: Recovered in 3 days after Fed backstop
What happened: ETH crashed 50% in one day. DAI briefly traded at $1.10+ as people scrambled to repay loans.
Outcome: Recovered, MakerDAO improved liquidation system
"The difference between USDT and UST is three letters and $40 billion in losses. Know your stablecoins."
— Crypto Trader Wisdom
How to Choose the Right Stablecoin
| Use Case | Best Choice | Why |
|---|---|---|
| Active Trading | USDT | Best liquidity, most pairs |
| Long-term Storage | USDC | Most regulated, transparent |
| DeFi (Ethereum) | DAI | Decentralized, composable |
| Privacy Concerns | DAI / LUSD | Can't be frozen |
| US-based User | USDC | Regulatory clarity |
Safety Tiers
Tier 1: Safest
- USDC (regulated, transparent)
- DAI (decentralized, over-collateralized)
- USDP (Paxos, regulated)
Tier 2: Moderate Risk
- USDT (huge but less transparent)
- FRAX (partially algorithmic)
- TUSD (smaller, variable backing)
Tier 3: Avoid
- Pure algorithmic stables
- Unknown/new stablecoins
- Under-collateralized projects
Stablecoin Safety Strategy
The Diversification Approach
Don't put all your stables in one basket:
- Split large holdings — 40% USDC, 40% USDT, 20% DAI
- Use different chains — Some on Ethereum, some on L2s
- Keep some in hardware wallet — Not all on exchanges
- Monitor depeg alerts — Set price alerts below $0.99
Earning Yield on Stables
Stablecoins can earn 5-15% APY in DeFi through lending (Aave, Compound) or liquidity provision. But yields come with smart contract risk. Higher APY = higher risk.
Red Flags to Watch
- Stablecoin trading below $0.98 for extended period
- Reserves not matching circulating supply
- Company refusing audits or attestations
- Regulatory crackdowns in issuer's jurisdiction
- High yield promises (20%+) on stables = likely ponzi
The Bottom Line
Stablecoins are essential crypto infrastructure — but they're not risk-free. Understanding the differences between USDT, USDC, and DAI can save you from the next depeg disaster.
Stablecoin Checklist
- Never use purely algorithmic stablecoins for storage
- Diversify across USDC, USDT, and DAI
- Check reserve attestations/audits regularly
- Set price alerts for any holdings below $0.99
- Keep large holdings in self-custody (hardware wallet)
- Understand that even "safe" stables can depeg temporarily
In crypto, even "stable" isn't guaranteed. Choose wisely.