Stablecoins are tokens which are typically pegged to the value of a specific currency or commodity and are designed to offer stability in the volatile world of cryptocurrencies though not all stablecoins achieve this goal in the same way depending on the mechanism a stablecoin uses.
It can be placed into one of three main categories fiat-backed crypto-backed or algorithmic Fiat-backed stablecoins:
- Fiat Backstable Coins
- Crypto-backed stablecoins
- Algorithmic Backed stablecoins
We will know what are each of these 3 types of stablecoins one by one starting with:
Also Read: What Are The Pros And Cons Of Types of Stablecoins (Choosing The Best)
Fiat Backstable Coins
The first category of stable coins is Fiat backstable coins such as usdt and usdc and is by far the most popular these stable coins are backed by reserves of traditional.
Fiat currencies such as the US dollar or the euro to maintain their one-to-one Peg to a currency the stablecoin issuer ideally holds the currency in cash or cash equivalents. Such as treasuries which should match or exceed the circulating supply of the stablecoin.
Crypto-Backed Stablecoins
Next, we have Crypto-backed stablecoins, the crypto backstable coins as their name suggests crypto backstable coins originate from defy applications and are backed by cryptocurrencies held as collateral.
However due to the volatile nature of cryptocurrencies crypto-backed stables typically require over collateralization to a specific ratio to ensure stability for instance a collateralization ratio requirement of 150% means that a user needs to deposit 150 dollars worth of crypto to mend one hundred dollars of a stable coin examples of crypto collateralized stable coins.
This include dye which is currently the largest crypto-backed stable coin by market capitalization or LUSD which is 100 backed by eth.
It’s worth mentioning that even though Dai was designed to be a decentralized stable coin its collateral includes a large percentage of usdc usdp and gusd which are centralized Fiat back stable coins and even U.S treasuries.
Algorithmic Stablecoins
The third category Algorithmic stablecoins is algorithmic stable coins which are also meant to be decentralized in nature but unlike over-collateralized stable coins they may or may not actually be backed by anything.
Instead they rely on algorithmic and incentive mechanisms to maintain their price stability however historically this mechanism has not been sustainable since it’s dependent on consistent demand being there for the stablecoin and once that disappears they go into a so-called death spiral.
Where the mechanism collapses the stable coin basis cache empty set dollar Titan and most infamously terra’s UST are some of the examples of failed algorithmic stable coins these are the three main types of stablecoins.
Some Other Types Of Stablecoins
Other types categories but there are also other stable coins that don’t fit neatly into them like frax which launched as the first partially algorithmic stablecoin though a recent Community vote has decided to shift the stablecoin to a fully crypto collateralized model over time.
Meanwhile some stable coins Peg their value to physical assets like precious metals or other Commodities such as paxos gold and tether gold which claim to hold physical gold in reserves finally there are even non-peg-stable coins like Rye.
These are crypto backed but do not have their value tied to any specific asset and have their value fluctuate based on supply and demand if Outro you’re wondering why all the different designs it’s worth noting that like the blockchain trilemma of security decentralization and scalability.
Stable coins also face their own trilemma of stability decentralization and capital efficiency whereby any stable coin design typically has to sacrifice this one aspect to achieve the other two so far the race to create a stable coin which effectively optimizes for all three is still on if you want to learn more about decentralized stable coins.
Difference Between Fiat Vs Commodity Vs Crypto Stablecoins
| Type | Description | Example | Key Points |
|---|---|---|---|
| Fiat-Collateralized | This is valued in fiat currencies such as the United States dollar (USD) or the Euro (EUR). There is a general belief that it has an equal amount of issued stablecoins, with the number in the reserved fiat currency. | USDT (Tether), USDC (USD Coin) | – Reserve composition consists of loans that are secured corporate bonds, funds, and precious metals. – It has a peg to the fiat currency of 1:1 ratio. |
| Commodity-Collateralized | Collateralized with commodities, for example, gold, silver, or oil. This would mean that the issuer backs every stablecoin issued with a fixed value in the commodity. | Tether Gold (XAU₮), Digix (DGX) | – Reserve is made up of physical items. – Maintains a peg of 1:1 with the commodity. |
| Crypto-Collateralized | Backed by other cryptocurrencies such as Bitcoin or Ethereum. The issuer matches every unit of issued stablecoin with similar amounts of reserve cryptocurrency. | DOC (Money on Chain), USDRIF (RIF-based) | – Reserve is related to other cryptos. – It is always pegged 1:1 to the backing cryptocurrency. |
These types of stablecoins differ primarily in the assets they use to maintain their peg. Fiat currencies back fiat-collateralized stablecoins, commodity-collateralized stablecoins are backed by commodities and crypto-collateralized stablecoins are backed by other cryptocurrencies.
