[+] Dai's monetary policy is not autonomous; new units can only be issued for sufficient collateral and must be destroyed when value falls too low, a constraint that would make a central bank not be regarded as autonomous.
The PSM takes your USDC and mints new DAI and gives it to you. When DAI is >$1 you can make an instant profit doing this. (take 1 USDC, trade it for 1 DAI that you can sell for $1.001.)
The PSM takes your DAI and gives you USDC (while stocks last.) When DAI is >$1 you can make an instant profit doing this. (buy 1 DAI trading at $0.999, and swap it for 1 USDC worth $1.)
Notice the issue? The PSM within DAI is contingent on having enough USDC (proxy for USD) to keep the peg. When that reserve runs out, the PSM mechanism breaks and the peg fails.
To suggest otherwise is financial alchemy.
The auction function doesn't work if USDC suddenly isn't worth 1 USD, because then you're facing down a reserve that isn't worth "more" than DAI, even though the algo still thinks it's in balance.
Basically you've tied DAI to USDC, which in turn is tied to Coinbase, which in the event of a bank run/bankruptcy event will freeze assets and cause massive capital flight causing people to sell their USDC for less than 1 USD as they flee for safety. This causes DAI to become unbalanced because their reserve of USDC isn't actually worth what it should be in USD terms, causing DAI to also lose the peg in terms of real US dollars.
I'm telling you, there isn't a way to make this stuff work. It's financial alchemy.
If USDC loses value, those vaults will be liquidated and the collateral will shift over to alternates - ie. eth. The scenario you are mentioning only plays out if USDC falls so much (and quickly enough that the auction bots don't respond) that it cancels out the overcollateralization from eth. given that dai is 166% collateralized, it wpuld have to drop a ton, which is difficult to imagine when it is credibly backed by real assets.
Exchanges respond by sealing themselves off to protect their $3000 ETH from the $6000 fake ETH trade prices, thus creating a massive freeze in the market, thus wrecking the redemption system that underpins DAI.
It's very, VERY important to realize that all of these things are interwoven. There's no such thing as "USDC collapsing" without it also taking all the crypto traded on Coinbase with it.
Explain to me how you arbitrage USDC falling out of Dai?
I really encourage you to read up more on this. There are real risks that come with Dai as a stablecoin (including eth or USDC collapsing very quickly) but they are not the risks that you are identifying.
I likewise encourage you to think about this from first principles and read up on the mechanics of a currency peg. You MUST be able to quickly sell T-bills on the market swiftly to defend your currency peg, otherwise you will see your currency break from the pegged range. DAI is shifting the reserves from directly holding USD or T-bills to holding USDC instead, which isn't the same thing as USD and WILL cause problems for DAI.