Stablecoins have become foundational assets in the decentralized finance (DeFi) ecosystem and broader cryptocurrency markets. Designed to maintain a stable value—typically pegged to the US dollar—they serve as reliable mediums of exchange, stores of value, and on-ramps into digital asset trading. However, their stability is not guaranteed, especially during periods of market stress. The events of March 2023 revealed critical vulnerabilities and highlighted stark differences between stablecoin primary markets and secondary markets, offering deep insights into how design, accessibility, and market structure influence resilience.
This article explores the mechanics of stablecoin issuance and trading, analyzes the March 2023 market turmoil through the lens of four major stablecoins—USDC, USDT, BUSD, and DAI—and reveals how primary market dynamics can diverge dramatically from secondary market price movements. By integrating on-chain data with economic theory, we uncover essential lessons for investors, developers, and researchers navigating the evolving landscape of digital dollars.
Understanding Stablecoin Design and Market Structure
Types of Stablecoins
Stablecoins are broadly categorized based on their collateralization model:
- Fiat-backed stablecoins are supported by reserves of cash and cash equivalents such as bank deposits, Treasury bills, and commercial paper. Examples include USDC and USDT. These are typically centralized, with a single issuer responsible for minting and redeeming tokens in a 1:1 ratio with fiat reserves.
- Crypto-collateralized stablecoins, like DAI, are backed by overcollateralized crypto assets such as ETH or other stablecoins. Issuance is managed via smart contracts on blockchains, enabling decentralized access.
- Algorithmic (or non-collateralized) stablecoins rely on algorithmic mechanisms to adjust supply based on demand, often without direct backing. Though less prevalent after high-profile failures like TerraUSD, they remain a subject of academic and experimental interest.
Each design impacts price stability, accessibility, and systemic risk. But beyond the technology lies a crucial distinction: the separation between primary and secondary markets.
Primary vs. Secondary Markets: The Core Divide
What Is the Primary Market?
The primary market refers to the direct issuance and redemption of stablecoins by the issuer or protocol:
- In fiat-backed models, only approved institutional clients—such as exchanges or fintech firms—can mint or burn tokens.
- In decentralized models like DAI, any user interacting with smart contracts can generate or repay stablecoins by depositing or withdrawing collateral.
Primary market activity directly affects supply. When users redeem stablecoins for fiat (or burn them), supply decreases. When new tokens are minted, supply increases—ideally aligned with demand.
What Is the Secondary Market?
The secondary market is where stablecoins are traded among users on exchanges—both centralized (CEX) and decentralized (DEX) platforms. Prices here fluctuate based on supply and demand imbalances, sentiment, and liquidity conditions.
While the primary market controls supply, the secondary market sets price. A stablecoin may trade above or below $1 depending on confidence, redemption delays, or platform-specific risks—even if its reserves remain intact.
This disconnect became glaringly evident during the March 2023 banking crisis.
Case Study: The March 2023 Stablecoin Turmoil
On March 10, 2023, Circle—the issuer of USDC—announced that $3.3 billion of its reserves were temporarily trapped in Silicon Valley Bank (SVB), which had been placed under regulatory control. Despite assurances of full backing, **USDC lost its peg**, dropping below $0.90 within hours.
Other stablecoins reacted sharply:
- DAI, partially backed by USDC, also depegged.
- BUSD saw reduced trust due to prior regulatory restrictions.
- USDT briefly traded at a premium as traders sought refuge.
Yet behind these price moves lay vastly different behaviors in the primary markets, revealing that price alone does not tell the full story.
Stablecoin Profiles: USDC, USDT, BUSD, DAI
USDC – Centralized Fiat-Backed with Limited Access
Issued by Circle, USDC operates a closed primary market accessible only to vetted institutions. Retail users must rely entirely on secondary markets.
After the SVB announcement:
- Circle suspended redemptions over the weekend.
- Redemption queues built up off-chain.
- On-chain burning continued but at low volume—indicating limited ability to exit.
- No significant minting occurred during the crisis.
Despite price drops, the lack of large-scale redemptions suggests many holders were unable to access the primary market—a critical vulnerability under stress.
BUSD – Regulatory Halt Preceded Crisis
Paxos issued BUSD but was ordered by regulators in February 2023 to stop new issuances. Thus, during March:
- Only redemptions (burns) were possible.
- Supply steadily declined.
- Market cap dropped over $2 billion despite temporary price premiums.
The regulatory freeze effectively shut down its primary market expansion—highlighting how external policy can override market dynamics.
USDT – Resilience Through Diverse Issuance
Tether (USDT) maintains strict access controls—minimum $100,000 per transaction—but continued normal operations during the crisis. Notably:
- USDT supply increased by ~$9 billion in March.
- Net inflows into secondary markets grew.
- Traded at a slight premium—indicating strong demand as a safe haven.
Its multi-chain presence (especially on Tron) likely enhanced liquidity resilience compared to single-chain peers.
DAI – Decentralized but Exposed
DAI stands out:
- Open access: anyone with crypto collateral can generate DAI.
- Multiple vault types allow ETH, WBTC, or even USDC as collateral.
- A "stability module" lets users swap USDC for DAI 1:1—linking it directly to USDC health.
During the crisis:
- DAI depegged alongside USDC.
- Yet experienced net issuance growth—users kept generating new DAI despite volatility.
- This suggests traders used DAI not just as a store of value but as a leveraged tool amid uncertainty.
Unlike USDC, DAI’s primary market remained fully operational—demonstrating decentralization’s advantage in continuity.
Secondary Market Activity: CEX vs. DEX
While both centralized and decentralized exchanges saw surges in trading volume post-SVB collapse, patterns differed:
- DEX volume spiked to over $20B daily, far exceeding historical norms.
- CEX volume rose moderately, staying within typical ranges.
- DEX peaks preceded CEX peaks—suggesting early movers used DeFi platforms first.
Despite this, price convergence across venues remained tight. Automated market makers (AMMs) on DEXs helped stabilize prices through arbitrage opportunities—even when primary redemptions were constrained.
This highlights a key insight: decentralized markets can absorb shocks faster when primary redemption is limited, provided sufficient liquidity exists.
Primary Market Flows: Hidden Signals Beneath the Surface
Using on-chain data from Ethereum:
| Stablecoin | Key Primary Market Trait |
|---|---|
| USDC | Institutional-only; redemption paused |
| BUSD | No new issuance allowed |
| USDT | High minimums; active minting |
| DAI | Open access; net issuance up |
Analysis shows:
- USDC saw massive net outflows from secondary to primary markets—holders tried to redeem.
- DAI had net inflows into secondary markets—even while depegged.
- USDT was the only one with consistent net flow into secondary markets, signaling confidence.
These flows reveal that market sentiment isn’t just about price—it’s about where money moves.
Frequently Asked Questions (FAQ)
Q: Why did USDC lose its peg even though reserves were safe?
A: Confidence matters more than balance sheets in real time. Even though Circle eventually recovered all funds, the perception of inaccessible reserves triggered panic selling. Without immediate redemption options for retail users, downward pressure intensified in secondary markets.
Q: How can DAI depeg if it’s overcollateralized?
A: Collateral quality and market psychology both matter. Since ~40% of DAI was backed by USDC at the time, exposure created contagion risk. When USDC dropped, so did confidence in DAI’s backing—even if mathematically solvent.
Q: Why didn’t BUSD benefit from being fiat-backed?
A: Regulatory action undermined trust. The February halt on new issuances signaled potential long-term uncertainty. Even with solid reserves, perception shifted toward BUSD being “wound down,” reducing its appeal as a safe haven.
Q: Can algorithmic mechanisms stabilize prices during crises?
A: Not reliably—at least not yet. While some protocols use rebasing or incentives to maintain pegs, extreme stress often overwhelms these systems. Overcollateralization and credible redemption rights remain more robust stabilizers.
Q: Are decentralized stablecoins safer than centralized ones?
A: They offer greater access and censorship resistance—but come with smart contract and oracle risks. DAI survived March 2023 well due to open minting, but future risks depend on governance and collateral diversity.
Q: What role do exchanges play in stablecoin stability?
A: Exchanges act as intermediaries between primary and secondary markets. When they pause redemptions or trading pairs (as many did with USDC), they amplify illiquidity. Their policies directly impact user trust and exit capacity.
Conclusion: Rethinking Stability Beyond the Peg
The March 2023 episode underscores that a stablecoin’s resilience depends not just on reserves—but on access, transparency, and market structure.
Key takeaways:
- Price depegging ≠ systemic failure, but it exposes structural weaknesses.
- Primary market accessibility determines who can exit—and when.
- Decentralized models like DAI showed agility, while centralized ones faced operational bottlenecks.
- Secondary markets reflect sentiment, but on-chain flows reveal deeper truths.
As stablecoins evolve into global financial infrastructure, understanding both layers—the mechanical (primary) and the behavioral (secondary)—is essential for building more resilient digital economies.