A trader in Lagos wants to move savings out of a currency that keeps losing value. A freelancer in Buenos Aires wants to get paid without waiting a week for a bank wire. Neither of them wants to hold bitcoin for the next two days. Both reach for the same tool: a token that claims to be worth exactly one dollar.

That claim is the product. Everything else — the reserves, the collateral, the smart contracts, the audits — exists to make the claim believable. And when belief wobbles, you find out quickly. In March 2023, USDC traded near 88 cents for a few hours after news broke that part of its reserves sat at Silicon Valley Bank.

So the useful question about any stablecoin isn't "what is it pegged to?" It's "what happens to my money if the thing behind it breaks?" Here's how the three largest models work, and what to look at before you hold one.

What a Stablecoin Is Actually Promising

A bank deposit, a money market fund and a stablecoin can all feel like "a dollar in an account." They are not the same instrument. A deposit is a claim on a bank, and in many countries it benefits from deposit insurance up to a limit. A money market fund holds short-term government debt and passes the yield to you. A stablecoin is a token with a redemption promise attached, and that promise is only as good as the entity making it and the assets standing behind it.

There is no deposit insurance here. If an issuer's reserves are mismanaged or frozen, the peg can break and there is no FDIC or equivalent stepping in for token holders. This is the single most important thing to internalise: "stable" describes the target, not a guarantee.

Stablecoins generally fall into three designs. Reserve-backed tokens hold cash and cash-like assets off-chain and promise redemption. Crypto-collateralised tokens lock up assets on-chain and issue the stablecoin as a loan against them. Algorithmic designs tried to hold the peg with code and market incentives alone, and the collapse of UST in 2022 showed how that ends. USDT and USDC are the first type. DAI is the second.

USDT: Reserve-Backed at Enormous Scale

Tether's USDT is the largest stablecoin by circulating supply and the one most people meet first, usually on an exchange in a market where dollar banking is awkward. Tether Limited holds a portfolio of reserves that is mostly US Treasury bills and other cash equivalents, alongside smaller allocations that have included secured loans, corporate bonds, precious metals and bitcoin. The company earns the interest on those reserves, which is where the business model comes from.

Transparency is the part to pay attention to. Tether publishes quarterly attestations prepared by an accounting firm. An attestation is a snapshot: it says what the firm saw on a given date. It is not the same as a full financial audit with an opinion on internal controls. That distinction matters more than the headline number in the press release, and it is worth reading the actual reserve breakdown rather than the summary.

Redemption is available directly from Tether for verified customers, but with minimums and onboarding requirements that most retail users will never meet. In practice you rely on the secondary market — swapping USDT on an exchange — which is fine most days and less fine during stress.

USDC: The Same Model, Built Around Compliance

Circle's USDC runs on the same principle with a different posture. Its reserves are held as cash and short-dated US Treasuries, with custody arrangements involving large regulated financial institutions and money market funds managed by established asset managers. Circle publishes monthly attestations and has generally leaned into regulatory frameworks, including the EU's MiCA regime, which shapes which tokens exchanges in Europe can list.

USDC's 2023 depeg is a useful case study because it wasn't a fraud story. It was plain counterparty concentration: a portion of reserves, roughly $3.3 billion, was sitting at a bank that failed over a weekend. Circle covered the gap once US access to the deposits was restored, and the peg recovered within days. Lesson: reserves held in cash at a bank carry bank risk, even when the cash is real.

DAI: Collateral on a Blockchain Instead of a Bank Account

DAI, issued by the MakerDAO protocol (now part of Sky), is built differently. There is no company you call to redeem it. Instead, users lock collateral into smart contracts called vaults and borrow DAI against it. To get your collateral back, you repay the DAI plus a stability fee. If the collateral's value falls too close to the debt, the position gets liquidated.

That collateral is a mixture. It includes volatile crypto assets like ETH and staked ETH, and it also includes a substantial share of other stablecoins such as USDC, plus real-world assets like short-term Treasury exposures arranged through partners. Governance token holders vote on which collateral is accepted, what the minimum collateral ratios are, and how fees work.

This design has real advantages: it's transparent on-chain, it doesn't depend on one company's bank accounts, and it runs globally without permission. It also stacks risks. Because a large slice of DAI's backing is other stablecoins, you are partly exposed to their issuers. Add smart contract bugs, oracle failures and the possibility that governance changes the rules in ways you didn't expect, and you have a different risk profile from USDT or USDC — not necessarily worse, but not the same.

A peg is a promise, and every promise has terms. Read the terms before you rely on them.

The Questions That Separate Good from Merely Popular

Forget marketing pages. Work through this list and you'll know more than most holders:

• Who owes you what? Is there a legal claim against an issuer, or does the token's value depend purely on market arbitrage?
• What is in the reserves, line by line? Look for the actual breakdown table. Watch for concentration in one bank, one fund manager or one other token.
• Attestation or audit? Attestations are point-in-time checks. Audits examine controls and processes. Knowing which you're looking at prevents a lot of misplaced comfort.
• Can you redeem at par? Who is eligible, what's the minimum, and how long does it take? If you can't redeem, you're a price-taker on whatever exchange you use.
• Who can freeze your tokens? USDT and USDC can blacklist addresses, typically in response to law enforcement or sanctions requests. DAI can't freeze a wallet, but governance can change collateral rules.
• What's the depeg history? Every major stablecoin has traded below a dollar at some point. Check how far it fell and how long it took to recover.
• Where are you holding it? A stablecoin on an exchange is also a claim on that exchange. That's two layers of counterparty risk, not one.

Risks That Reserves Alone Don't Solve

Even a fully backed stablecoin carries risk. Banking risk, as USDC showed, can appear overnight. Regulatory risk is real and evolving: rules in the EU and the US are reshaping which tokens can be offered on which platforms, and sudden delistings can force holders to sell in a hurry. Smart contract risk applies to DAI and to any stablecoin sitting in a lending protocol. And then there's the risk you choose yourself.

That last one deserves a sentence. If a platform offers you a high yield on USDC, the yield is not free — you are lending your stablecoin to someone, and you've taken on the risk that they don't pay it back. Treat double-digit stablecoin yields as a signal to read the mechanism, not a reason to click deposit.

One practical note: stablecoin holdings, redemptions and any yield you earn can have tax and legal consequences that vary by country. Worth a short conversation with a qualified adviser rather than a forum thread.

A Short Checklist Before You Buy

1. Open the issuer's latest reserve report and find the breakdown table. If you can't find it in two minutes, that tells you something.
2. Check the redemption terms and whether they apply to someone like you, in your country.
3. Look at the token's price history on a large exchange during past stress events. Recovery speed matters as much as the depth of the dip.
4. Split your exposure across at least two issuers if the balance is meaningful, and keep only what you need for near-term trading in any single token.
5. Watch the peg yourself. A price of $0.998 on a busy exchange is normal market noise. $0.97 means news has happened and you should know what it is.
6. Check where the token sits in your local rules and what your tax position looks like before you move size.

None of this is exotic. It's the same discipline you'd apply to a savings account or a bond fund, translated into a market that moves fast and explains itself badly. Stablecoins are genuinely useful tools for moving dollars across borders and settling trades. They're just not magic dollars, and the people who get hurt are usually the ones who assumed they were.

Photo: Ivan S / Pexels