Stablecoins: USDT, USDC, DAI - how they differ and what the risks are
What a stablecoin is, how it holds a one-dollar price, how USDT, USDC and DAI differ, and which risks to consider when holding and accepting them in deals.
In this article
The price of bitcoin or ETH can move 10% in a day. For a deal that is inconvenient: you agreed a price in dollars, and by the time of payment the amount has changed. A stablecoin is a token whose price aims to hold a fixed mark, most often one dollar. That is why stablecoins are most often used to pay for deals.
How a token holds its price
There are three main mechanisms.
Fiat-backed. The issuing company keeps dollars and similar assets in accounts and issues as many tokens as it has reserves. In theory you can get a dollar from the issuer for each token. USDT (Tether) and USDC (Circle) work like this.
Crypto-backed. A token is issued against another cryptocurrency as collateral, with the collateral exceeding the issuance: to get 100 DAI you may need to lock, say, 150 dollars in ETH. If the collateral falls in price the system sells it automatically so the token stays backed. DAI (the Sky/MakerDAO project) is built this way.
Algorithmic stability. A token holds its price only through "maths" and market incentives, without enough reserves. This category has done worst: the biggest failures in stablecoin history are linked to it.
The main tokens
| Token | Backing | Where used | Notes |
|---|---|---|---|
| USDT (Tether) | issuer's reserves | Ethereum, Polygon, BNB Chain and others | The most liquid. The issuer can block an address. |
| USDC (Circle) | issuer's reserves | Ethereum, Base, Polygon, BNB Chain | Regulated issuer, regular reporting. Addresses can be blocked. |
| DAI | crypto collateral (with a share of reserves) | Ethereum, Base, Polygon and others | More decentralised but depends on its governance system. |
Risks rarely mentioned
Issuer risk. If the issuer goes bankrupt, loses reserves or lies about having them, the token may fall. In March 2023, for example, USDC briefly dropped below a dollar: part of its reserves was held at a bank that suddenly collapsed.
Address blocking. For USDT and USDC the issuer can block any address and the funds on it become inaccessible. For deals this matters: if a recipient's address is blocked, the transfer fails. In our contract the amount in this case is kept as a "deferred payout" and can be withdrawn manually, but if the address is blocked permanently it cannot be.
Network risk. The same token exists on different networks as separate records. USDT on Ethereum and USDT on BNB Chain are different tokens; there is no automatic transition (only via bridges).
Different decimals. On Ethereum, Polygon and Base USDT and USDC have 6 decimals, on BNB Chain 18. This is not an error but a feature of the token's implementation. Interfaces handle it, but when working with contracts by hand it is a classic trap: the amount can differ by a factor of a trillion. More in the article on non-standard tokens.
The network fee is still in the main coin. You cannot pay for signing a transaction in a stablecoin: you need ETH, POL or BNB (depending on the network). You pay for the deal in stablecoin, and for gas in the main coin. On fees - the article on gas and networks.
How to choose for a deal
- For small and urgent deals, USDT or USDC on a cheap network is usually chosen.
- If minimal dependence on an issuer matters, look towards DAI.
- Take the network's main coin (ETH, POL, BNB) only if both sides are ready for price swings.
- Both sides must agree on the token and the network: a deal on Base is not visible on Polygon.
What to read next
Knowing what to pay with, look at what applications without intermediaries are built on: dApps and DeFi. Then understand how a guaranteed deal works and why money cannot simply be forwarded to the seller: what escrow is.
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Mentioned in
- What is cryptocurrency and where do coins come from
- What is a smart contract and why you can trust it with money
- Tokens and NFTs - what they are, how they differ and where they are used
- dApps and DeFi - decentralised applications and finance without middlemen
- Glossary - blockchain, wallets, smart contracts and escrow from A to Z
- Network fees (gas), L1 and L2: which network to choose for a deal
- How to choose a network for a deal - Ethereum, Base, Polygon or BNB Chain
- Non-standard tokens: USDT without a return value, fee-on-transfer and blacklists
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