Most traders park their deposits in USDT and never think twice about it. It seems logical: Bitcoin fluctuates by 10% a day, while USDT stays at exactly one dollar. Convenient. Familiar. Supposedly safe.

Yet in May 2022, people held their deposits in UST in the exact same way — and lost everything within a few days. The algorithmic stablecoin dropped to cents, wiping out about $40 billion along with it.

So what is the difference between USDT and UST? And why is this not an abstract question, but essential knowledge for any trader?

What is a Stablecoin and Why Does a Trader Need It

Simply put: a stablecoin is a cryptocurrency pegged 1:1 to the dollar. USDT and USDC on the exchange stay close to $1 while Bitcoin performs somersaults. For a trader, this is a working currency: most trading pairs on Binance are against USDT, profits are fixed in it, and entry points are awaited in it.

However, a 'stablecoin' is not a single mechanism. There are three fundamentally different designs, and how reliable the peg is depends entirely on the chosen design.

Three Types of Pegs: What is Inside

Fiat-backed (USDT, USDC). For every issued token, the issuer is obligated to hold a real dollar in reserve: cash in accounts and short-term US Treasury bills. This is the most conservative model — roughly speaking, a bank with 100% reserves.

How does this work in practice? Through arbitrage. If USDT drops to $0.99, large clients with direct access to Tether buy the token on the exchange and redeem it from the issuer for a flat dollar. The profit is a cent per token, the scale is millions of tokens. The price returns to the dollar. If USDT rises to $1.01, the opposite happens: new tokens are issued for $1 and sold on the market. The mechanism is elegant and works automatically — as long as trust in the reserves holds.

Crypto-backed (DAI). Instead of dollars, the reserves consist of other crypto assets, but with overcollateralization (e.g., 150% of the amount). The system is more complex and decentralized — but during a severe market crash, the collateral can quickly depreciate.

Algorithmic stablecoins (UST — rest in peace). The peg is maintained not by reserves, but by a mathematical algorithm and a second coin (in UST's case, LUNA). On paper, an elegant design. In practice, a house of cards in a storm.

UST: $40 Billion Into the Void

May 2022. UST is the third-largest stablecoin in the world by capitalization, backed by the Terra ecosystem with a multi-billion dollar TVL. The algorithm maintains the peg through a link with LUNA: want to issue UST — burn LUNA worth a dollar, want to redeem UST — get LUNA worth a dollar.

As long as everything grows, the system works. But when massive withdrawals began, the mechanism broke in reverse: UST was redeemed for LUNA, LUNA was emitted at accelerating rates, its price dropped — which forced even more UST to be redeemed. A classic death spiral.

Within a few days, UST dropped to cents. LUNA crashed from $80 to zero. About $40 billion evaporated. People who considered UST 'safe cash' exited to cash at the price of not-cash.

Tether: The Largest Stablecoin in the World — What's Inside

USDT today is around 120+ billion dollars in circulation. The scale is massive: Tether holds more US Treasury bills than Germany.

According to the BDO attestation as of September 30, 2026: $122.8 billion is held directly in US Treasury bills. For comparison, Germany holds about $107.8 billion according to Fed data (June 2026). On paper, the reserves look solid.

But this is where it gets interesting. An attestation is not an audit. It is a 'snapshot' on a specific date, prepared at the company's request. Tether has never undergone an independent full audit. This does not mean the reserves do not exist — it means you are taking the company's word for it along with the BDO document.

US regulators have taken a step in this direction: the GENIUS Act, signed on July 18, 2025, requires stablecoin issuers to maintain a 1:1 reserve in liquid assets and regular reporting. This is an important precedent — the market is moving toward the standards banks have long held.

Risks: What Can Actually Go Wrong

Not for the sake of panic — just an honest list of things that have killed stablecoins or given holders nerve-wracking experiences:

• Depegging during panic. In March 2023, USDT briefly traded around $0.995 amid the US banking crisis. Not critical, but it gave everyone a rush of adrenaline. USDC dropped to $0.87 during the same period due to frozen deposits at Silicon Valley Bank — and only returned to parity a few days later.
• Address freezing. Tether and Circle have the right to freeze a specific USDT/USDC address upon request from regulators or law enforcement. This is not theory — hundreds of addresses are already frozen. Your tokens can become inaccessible through no fault of your own.
• Regulatory risk. If the issuer's jurisdiction changes the rules, the conditions change too. The GENIUS Act currently works in favor of transparency, but regulation is a moving target.
• Counterparty risk of reserves. Treasury bills are good. But if part of the reserves is in commercial paper or deposits at troubled banks, the SVB and Circle story will repeat itself.
• Algorithmic schemes. UST is not the last of its kind. Any stablecoin without full fiat backing carries a risk proportional to the complexity of its algorithm.

Advantages and Reality

An honest balance looks like this:

What Works

• The arbitrage mechanism keeps the USDT and USDC peg stable under normal conditions
• Tether's scale is a stability factor in itself: too big for regulators to let it fall without a reaction
• The GENIUS Act pushes the market toward banking transparency standards

What Doesn't Work As It Seems

• 'Safe cash' is an illusion without understanding the reserves
• Attestation ≠ audit
• Address freezing is a real tool, not a scare tactic

Technical Perspective: How to View Depegging

On Binance, USDT trades in the USDT/USDC pair — this is one of the best fast indicators of peg health. The norm is the 0.999–1.001 range. When you see a sustained breakout beyond these boundaries for more than a few hours, the market knows something. This is a signal to check the news background regarding Tether, rather than ignoring it.

For a professional trader: keeping your entire portfolio in a single stablecoin is just as much concentration risk as holding everything in one coin. USDT + USDC + perhaps a small position in DAI is diversification that few practice, but which saved capital once before in March 2023.

Conclusion

USDT is worth a dollar because it is backed by real dollars and working arbitrage. UST was worth a dollar because the algorithm said so — until it didn't.

A stablecoin is only as reliable as its reserves and its issuer. Understanding this is not paranoia. It is basic risk hygiene for any trader keeping a working capital in USDT.

This material is educational and does not constitute financial advice. Sources: BIS Bulletin No 108 (2025), IMF 'Understanding Stablecoins' (2025), BDO attestation, FRED data.