"Back it up with enough securities that are backed up by enough securities that are backed up by enough securities, you will turn the literal shit the eventual security is backed up by into gold".
the problem with the crash is that the risk of the junk mortgages was not adequately assessed due to market failure.
The basic jist is that there are two ways of getting Dai, either
1. buying it from someone else with Dai (no extra $0.66)
2. minting it as a loan collateralized by your holdings in some other crypto (which requires $1 + X% backing) where X varies depending on the crypto. I believe you also get paid some "stability" fees for doing this, but I don't remember the detail. Because your vault gets liquidated if your collateral value goes below $1 + X%, people usually go considerably above $1 + X% in their collateral so there is no chance of that happening.
Some DAI is also minted by corporations that the DAO has voted to form a relationship with (so it's secured by actual loans into real-estate), but I believe that as of now this is a very small percentage of the whole.
All dai that you would buy from someone else is minted by #2 . You can see the backing here: https://daistats.com/#/
If vault gets below the $1 + X%, then it is automatically auctioned. You can imagine quickly being able to switch the collateral backing to USDC by voting to raise the X for ETH while vaults are being liquidated in auction.
basically, if ETH falls like this, demand for Dai will skyrocket due to the auctions, and the only collateralization left will be the stable collateral.
The people most likely to be screwed are vault holders whose collateral is auctioned at a discount to boost the price of Dai, but the Dai will remain stable.
> why not just use USDC then?
Because being diversified is good and USDC is entirely centralized.