Stablecoins Explained: USDT, USDC, DAI and How They Stay Pegged
Stablecoins are cryptocurrencies designed to hold a steady value. Learn how USDT, USDC and DAI work, and why they matter for UK crypto users.
Stablecoins are cryptocurrencies designed to hold a steady value — usually pegged to the US dollar, euro, or pound. While Bitcoin can swing 10% in a day, a stablecoin is meant to be worth exactly £1 (or $1) at all times.
They are the backbone of decentralised finance, the preferred way to move value between exchanges, and a growing part of global payments infrastructure. In 2026, the combined market cap of stablecoins exceeds $220 billion.
This guide explains the main types of stablecoins, how they maintain their peg, and what risks UK users should be aware of.
What Is a Stablecoin?
A stablecoin is a token that tracks the value of another asset — typically a fiat currency like the US dollar. When you hold 100 USDT (Tether), you should always be able to redeem it for $100 worth of value.
This stability is what makes stablecoins useful. They let you stay in the crypto ecosystem without exposure to price volatility. Instead of converting back to pounds when you want to avoid a Bitcoin dip, you can simply move your funds into a stablecoin.
Stablecoins are also used to pay crypto workers, transfer money internationally (often faster and cheaper than traditional bank transfers), and as the trading pair on most crypto exchanges.
The Three Main Types of Stablecoin
Not all stablecoins work the same way. There are three main approaches, each with different risk profiles.
Fiat-backed stablecoins are the most straightforward. The issuer holds real US dollars (or government bonds) in a bank account and issues tokens representing those reserves. USDT (Tether) and USDC (USD Coin) are the two largest.
USDC is issued by Circle and Coinbase. Circle publishes monthly attestations from accounting firm Deloitte confirming its reserves. As of May 2026, USDC has a market cap of approximately $45 billion.
USDT is issued by Tether and has a market cap of over $110 billion — making it the largest stablecoin by far. Tether has faced criticism for not fully auditing its reserves, though it publishes quarterly attestations showing it holds a mix of US Treasury bills, cash, and other assets.
Crypto-backed stablecoins use other cryptocurrencies as collateral instead of fiat currency. The most important example is DAI, issued by the MakerDAO protocol on Ethereum.
To create DAI, you lock up more than £1.50 worth of Ethereum for every £1 of DAI you want to create. This over-collateralisation creates a buffer — if ETH falls, your position is liquidated before the DAI supply becomes underbacked.
DAI is decentralised: no company controls it. It is governed by MKR token holders who vote on parameters like interest rates and collateral types.
Algorithmic stablecoins try to maintain their peg through code rather than collateral. They typically involve two tokens — one stablecoin and one governance token — and use an algorithmic mechanism to expand or contract supply.
In 2022, TerraUSD (UST) — the largest algorithmic stablecoin with a $18 billion market cap — collapsed to zero within 72 hours when confidence in the mechanism broke down. The collapse wiped out an estimated $40 billion in value and contributed to a broader crypto market crash.
Pure algorithmic stablecoins are now generally considered high-risk. Most new stablecoin designs use hybrid approaches with some real-world collateral backing.
How Stablecoins Maintain Their Peg
Fiat-backed stablecoins maintain their peg through arbitrage. If USDC trades at $0.99, arbitrageurs buy it cheaply and redeem it from Circle for $1.00, pocketing the difference and pushing the price back up. If it trades at $1.01, they mint new USDC at $1.00 and sell it on the open market.
This mechanism works well when the issuer’s reserves are trustworthy and redeemable. The main risk is that the issuer loses or mismanages the reserves — as happened with various smaller stablecoin projects over the years.
Crypto-backed stablecoins maintain their peg through liquidation mechanisms. If the collateral value falls below a certain threshold, the smart contract automatically sells it to cover the outstanding DAI.
Stablecoins Under UK Law
The UK government has been developing a regulatory framework for stablecoins since 2022. In 2025, the Financial Services and Markets Act gave the FCA and Bank of England powers to regulate fiat-backed stablecoins used in UK payments.
In 2026, any stablecoin used as a means of payment in the UK must meet FCA registration requirements. This includes capital requirements, redemption rights for holders, and restrictions on where reserves can be held.
The Bank of England has also proposed that very large stablecoins — those that could pose systemic risk to the UK financial system — face additional supervision from the Prudential Regulation Authority.
For UK users, this means that major stablecoins like USDC are likely to become more regulated and therefore safer over time. However, algorithmic and offshore stablecoins remain outside this regulatory perimeter for now.
Stablecoin Risks for UK Users
Even well-established stablecoins carry risks that users should understand.
De-pegging risk: Any stablecoin can temporarily or permanently lose its peg. In March 2023, USDC briefly fell to $0.87 after its issuer Circle disclosed it had $3.3 billion in deposits at Silicon Valley Bank when the bank collapsed. The peg was restored within 48 hours once it became clear the deposits were guaranteed, but it demonstrated that even top-tier stablecoins can waver.
Counterparty risk: With fiat-backed stablecoins, you are trusting the issuer to hold reserves properly. If Tether or Circle were to face insolvency, USDT or USDC holders could lose money.
Regulatory risk: Governments could restrict or ban certain stablecoins. The European Union’s MiCA regulation has already restricted USDT on regulated exchanges due to Tether’s failure to comply with certain requirements.
Smart contract risk: For algorithmic and crypto-backed stablecoins, bugs in the underlying smart contract could lead to loss of funds.
What This Means for UK Crypto Users
Stablecoins are a useful tool for UK crypto users. They let you move in and out of volatile positions without converting to sterling, reduce exchange fees (most DEX trading pairs use stablecoins), and are increasingly accepted for international payments.
The safest options for most UK users are USDC and USDT — both widely supported and redeemable for US dollars. USDC has slightly better regulatory compliance, while USDT has more liquidity on most exchanges.
UK HMRC treats stablecoin disposals as taxable events — even converting from USDT to USDC counts as a disposal. Keep records of every stablecoin transaction to avoid issues at tax time.
This article is for educational purposes only and does not constitute financial advice. Cryptocurrency investments involve significant risk. Always do your own research.
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