Stablecoins can be broadly classified into the following categories based on their underlying collateralization method:
Fiat-backed stablecoin
These stablecoins are backed by fiat reserves, usually held in bank accounts. For each stablecoin issued, an equal amount of fiat currency is held in reserve, ensuring that the value of the stablecoin is maintained. Common examples include Tether (USDT), the first and most widely used stablecoin pegged to the US dollar, as well as Tether (USDT), which is backed by US dollar reserves and regularly audited to ensure transparency. This includes USD Coin (USDC), a stablecoin.
Commodity-backed stablecoin
These stablecoins are pegged to the value of physical goods. For example, Tether Gold (XAUt) is a stablecoin backed by gold reserves. The value of these stablecoins fluctuates depending on the market price of the underlying commodity, providing an alternative for users who prefer tangible assets as collateral.
Crypto-backed stablecoin
Crypto-backed stablecoins are backed by other cryptocurrencies. These stablecoins utilize smart contracts to lock up volatile collateral and issue stablecoins. One example is Dai, which is generated by locking Ethereum in a smart contract and minting Dai against it. This method allows for more decentralization, but comes with risks associated with the volatility of the underlying cryptocurrency.
algorithmic stablecoin
Algorithmic stablecoins do not rely on collateral and use algorithms to control the supply of stablecoins according to market demand. When a stablecoin’s price deviates from its peg, the algorithm mints or burns the coin to stabilize its value. This approach has had mixed results, with some projects failing due to the complexity of maintaining price stability without collateral.
