Stablecoins are digital currencies designed to maintain parity with a fiat currency, usually the US dollar or some other strong currency.
Although they may seem similar, each stablecoin has distinct mechanisms of issuance, collateral, governance, and purpose of use. Understanding these differences is essential to assess the risk, utility, and security when using each of them, especially in the DeFi ecosystem and in institutional applications.
In this article, we will present the specifics of these three projects, so you understand if any of them (or even more than one) could end up in your portfolio.
Three ways to maintain $1 on the blockchain
Current stablecoins can be classified into three broad categories. In the fiat model, such as USDT and USDC, each token is backed by real reserves in currency or high liquidity assets, like U.S. Treasury securities. The issuers maintain these reserves in banks and offer guarantees for parity redemption at any time. Trust in this model is directly linked to the transparency of management and the regulation of the institutions involved.
In the decentralized model collateralized by crypto assets, such as DAI, issuance occurs through smart contracts. Users lock volatile assets like ETH or wBTC in smart vaults to issue DAI. To protect the stability of the currency, the system requires over-collateralization, that is, a locked value greater than the DAI issued. This ensures a cushion in case of market fluctuations.
Finally, there is the algorithmic model, which adjusts supply and demand via smart contracts and programmed rules. This model, however, suffered severe credibility losses after the collapse of UST in 2022.
The three protagonists: USDT, USDC, and DAI
USDT (Tether) is the most widely used stablecoin in the world. Issued by Tether Holdings, based in Hong Kong, it is primarily used on centralized exchanges for global trading. Its reserves consist of U.S. Treasury securities, short-term instruments, and, to a lesser extent, cash. Although it has made progress in publishing audited reports, the company's history includes regulatory scrutiny and fines related to a lack of transparency.
USDC, in turn, is issued by Circle, an American company that works with regulated banks like BNY Mellon. The stablecoin has gained strength in institutional environments due to its transparency and regulatory compliance focus. Circle publishes audited reports and provides daily updates on its backing in Treasury securities, seeking to provide maximum visibility to the market. Additionally, Circle plans to go public and expects to raise $624 million with this move.
The DAI, created by MakerDAO, is a fully decentralized stablecoin. Its issuance does not depend on banks or financial institutions, but rather on smart contracts that maintain collateral in crypto. In times of extreme volatility, the protocol uses mechanisms such as the Peg Stability Module (PSM), which accepts other stablecoins like USDC to maintain the price of DAI stable.
How the issuance and burning cycle works
The life cycle of a fiat stablecoin is simple: when an investor transfers funds to the issuer, tokens are created and sent to their wallet. When that investor wishes to redeem the funds, the tokens are returned and burned.
This ensures that the amount of tokens in circulation reflects the deposited funds. In the case of DAI, minting and burning are done directly by the user when interacting with the smart vaults, which adds a layer of autonomy and control to the process.
It is important to emphasize that, as they are projects collateralized in fiat currencies, it is precisely this reliability of reserves that increases/decreases with the tokens that are created/burned that paves the way for continued use - and such matters usually undergo auditing in these different projects.
Use cases and competitive advantages
USDT is widely used in emerging markets, such as Latin America and Southeast Asia, due to its liquidity and presence on various low-cost blockchains like Tron and Polygon. It is common in arbitrage operations, international remittances, and as a hedge against inflation.
USDC has gained traction as the preferred stablecoin in DeFi and institutional applications. Its stability and legal compliance attract large companies, funds, and projects for tokenization of real-world assets. Additionally, it is used in international payrolls, inter-company transfers, and financing contracts.
DAI stands out in the DeFi ecosystem as neutral and decentralized collateral. Its presence is strong in lending, liquidity, and staking protocols. Moreover, because it does not depend on centralized entities, it is preferred by DAOs and projects that prioritize data sovereignty.
Risks associated with each model
Fiat stablecoins are subject to legal risks, censorship, and wallet freezing. In 2023, Circle blocked thousands of addresses linked to suspicious activities, demonstrating how regulation can affect the end user. There is also the risk that partner banks may face insolvency or that legislative changes may affect the liquidity of reserves.
DAI, although more resistant to censorship, faces risks related to the volatility of collateral, oracle failures, and bugs in smart contracts. Situations such as the abrupt drop of ETH or coordinated attacks on specific vaults can temporarily compromise the stability of the peg.
Algorithmic stablecoins, which seek stability without real reserves, continue to be viewed as experimental. The collapse of UST (Terra) exposed the vulnerability of this model, where trust is the main asset. A loss of faith in the market can lead to an irreversible collapse.
What to expect for the future of stablecoins
The sector is moving towards greater regulation and professionalization. Tether and Circle have reinforced transparency and adjusted reserves to include higher liquidity securities. Projects like PayPal USD and First Digital USD emerge with a focus on compliance and banking integration, and they are expected to pressure traditional players to enhance their standards.
In the crypto-native sphere, DAI plans to migrate to a model with sub-DAOs and diversify its collateral with real-world assets, such as tokenized securities and receivables. This evolution could enhance the robustness of the protocol and expand its use cases.
Different stablecoins, complementary missions
USDT, USDC, and DAI are the main pillars of the stablecoin ecosystem in 2025, each with its architecture, advantages, and limitations.
The choice between them depends on the user's profile: traders and remittances seek quick liquidity with USDT; companies and institutions prioritize compliance and transparency of USDC; decentralized protocols prefer the programmable neutrality of DAI.
In a constantly evolving scenario, understanding the differences is essential for making informed and secure decisions in the crypto asset market.
And you, do you have stablecoins in your portfolio?
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Photo by upklyak, available on Freepik
