Stablecoins are a form of cryptocurrency intended to keep a consistent value by tying their worth to another asset, such as a fiat currency (like the Dollar or Euro) or commodities like gold. By anchoring their value to more stable assets, stablecoins seek to minimize the price volatility often seen with cryptocurrencies.

Stablecoins have become a cornerstone in the cryptocurrency market, with their market capitalization growing significantly over the past few years. This price stability makes them useful for everyday transactions and encourages wider use. For traders, converting cryptocurrencies to stablecoins can protect profits and safeguard against market drops. They also streamline global payments, allowing fast and low-cost transactions without the price fluctuations of other cryptocurrencies. Overall, stablecoins enhance security and efficiency in trading and international money transfers.

To dive deeper into the role of stablecoins and their significance in the crypto ecosystem, check out our article on why are stablecoins so important →

The 4 Different Types of Stablecoins

Stablecoins come in various types, each designed to maintain a stable value through different mechanisms. The four main types of stablecoins—fiat-backed, crypto-backed, commodity-backed, and algorithmic—offer unique approaches to price stability and risk management in the cryptocurrency market.

Fiat-backed Stablecoins

Fiat-backed stablecoins offer market price stability by being directly backed by traditional fiat currencies such as the U.S. Dollar or Euro in reserves. These reserves are managed by custodians and are audited regularly to ensure transparency. Notable examples include Tether (USDT) and USDC token from Circle, both of which aim to maintain a 1:1 value with the Dollar.

Commodity-backed Stablecoins

Commodity-backed stablecoins fall under the category of fiat-collateralized stablecoins, as they are tied to the market value of resources like gold, silver, or oil. These cryptocurrencies often hold physical commodities or financial instruments such as ETFs through third-party custodians. One of the main advantages of commodity-backed stablecoins is that they offer convenient access to commodity investments, much like other tokens. However, they also face drawbacks similar to those of fiat-backed stablecoins, relying on centralized entities for reserve management, which contradicts the decentralized nature of cryptocurrencies.

Crypto-backed Stablecoins

Crypto-backed stablecoins are secured by a variety of cryptocurrencies assets, such as Bitcoin (BTC), Ethereum (ETH), or tokenized ETFs available in the market. They are typically over-collateralized to enhance security and reduce value fluctuations. A key advantage of these stablecoins is their decentralization and accessibility, aligning with the core principles of cryptocurrency. Many also enable users to earn passive income by distributing revenue from their reserves, which are generally transparent and verifiable, lessening the dependence on centralized entities. Notable examples include DAI (now USDS) and USDA from Angle Protocol.

Algorithmic Stablecoins

Algorithmic stablecoins are a type of stablecoin that utilize software algorithms and smart contracts to automatically adjust the supply based on demand changes, aiming to keep a stable price without holding actual reserves. A key advantage of these stablecoins is their decentralized nature. However, they also have notable disadvantages that can present significant risks. One major concern is their dependence on complex mechanisms, which can fail to maintain the price peg. A prominent example is TerraUSD (UST), which saw its value drop by over 60% on May 11, 2022, after the related Luna token lost more than 80% of its value in just one night, leading to a complete loss of its peg to the U.S. Dollar.

Examples of Stablecoins by Collateral Type

Stablecoins are categorized by the type of collateral that backs their value, each with unique mechanisms to maintain price stability. Below are examples of stablecoins classified by their collateral types, including fiat-backed, commodity-backed, crypto-backed, and algorithmic stablecoins.

Examples of Fiat-backed Stablecoins

Tether (USDT)

Tether (USDT), introduced in 2014 by Tether Limited, is one of the leading stablecoins available today. Its design is centered around a 1:1 peg to the U.S. Dollar, with each USDT tokens claimed to be backed by $1 fiat currency held in reserve. Developed to facilitate fast value transfers and mitigate the price volatility found in other cryptocurrencies, USDT has garnered interest from traders and investors. However, questions regarding the transparency of its reserves have sparked controversies. Despite these issues, Tether continues to hold the position of the largest stablecoin by market capitalization.

USD Coin (USDC)

USD Coin (USDC), launched in September 2018 by Circle in partnership with Coinbase, is a stablecoin that maintains a 1:1 peg fiat currency to the U.S. Dollar. Unlike certain other stablecoins, USDC is fully regulated and undergoes regular audits, ensuring greater transparency regarding its reserves. Circle holds its fiat reserves in centralized financial institutions, which introduces some counterparty risk. Nevertheless, USDC has become popular as a more transparent alternative to Tether, bolstered by strong financial partnerships, including investments from firms like Goldman Sachs. The USD Coin (USDC) token is the second largest stablecoin by market capitalization.

Examples of Commodity-backed Stablecoins

Tether Gold (XAUT)

Tether Gold (XAUT) is a stablecoin pegged to the value of gold. Each XAUT token represents indirect ownership of one troy ounce of physical gold, securely stored in vaults. This cryptocurrency combines the benefits of physical gold with the convenience and liquidity of digital assets, allowing holders to conduct transactions globally while avoiding the traditional challenges associated with gold storage. Issued by Tether, XAUT aims to merge the price stability of gold with the flexibility and security of blockchain technology, utilizing Ethereum for transparent and secure transactions. Holders of XAUT can either redeem their tokens for physical gold or trade them on partner platforms.

PAX Gold (PAXG)

Pax Gold (PAXG) is a stablecoin backed by physical gold, where each token represents one troy ounce of fine gold. Operating on the Ethereum blockchain, PAXG allows users to buy, sell, and exchange tokens for physical gold. It combines the benefits of cryptocurrencies, like fungibility and liquidity, with gold ownership, without the drawbacks of storage and transport costs. Each PAXG token is linked to a specific ounce of gold stored securely in London by Paxos Trust Company. Investors can trade PAXG on various cryptocurrency exchanges, and its price closely tracks that of physical gold, while being divisible up to 18 decimal places for added flexibility.

Examples of Crypto-backed Stablecoins

Ethena USDe (USDe)

Ethena (USDe) is a decentralized synthetic Dollar protocol built on Ethereum, designed to provide a stablecoin alternative for DeFi and Web3 applications. It utilizes a delta hedging strategy to ensure price stability, scalability, and resistance to censorship. Each USDe is backed by a diversified basket of cryptocurrencies, aiming to maintain a stable parity with the U.S. Dollar.

USDA (USDA)

USDA, the stablecoin from Angle Protocol, represents the future of stablecoins with its innovative over-collateralized approach. Pegged 1:1 to the U.S. Dollar, USDA is supported by a diversified reserve of assets, including tokenized Treasury Bills, government bonds, Ethereum, Bitcoin, and other liquid stablecoins. What truly distinguishes USDA is its ability to generate secure yields for holders, derived from both traditional finance (TradFi) and decentralized finance (DeFi). This enables users to achieve optimal returns without needing to switch between different financial systems. As liquid as USDC, USDA can be easily exchanged without fees or slippage, positioning it as a significant player in onchain forex markets.

Examples of Algorithmic Stablecoins

USDD (USDD)

USDD (Decentralized USD) is an algorithmic stablecoin launched in 2022 by Justin Sun, the founder of the Tron DAO. It operates across multiple blockchain networks, including Ethereum, Tron, and BNB Chain, and is pegged to the U.S. Dollar at a 1:1 ratio. The USDD token is over-collateralized, backed by a diverse range of digital assets such as TRX, BTC, and USDC, ensuring its stability and price value. It is designed to maintain a fixed exchange rate against the U.S. Dollar, making it a reliable store of value within the decentralized ecosystem and DeFi applications.

Frax (FRAX)

FRAX is a decentralized stablecoin pegged to the U.S. Dollar that employs a mix of collateral and algorithmic mechanisms to maintain its stable value. It is part of the Frax Finance ecosystem, which provides a variety of DeFi services, including lending and liquidity provision.

FAQs about the type of Stablecoins

How Many Types of Stablecoins are there?

There are four types of stablecoins in the market: fiat-backed, commodity-backed, crypto-backed, and algorithmic stablecoins.

What are the 4 Types of Stablecoins?

Fiat-backed stablecoins are pegged to traditional currencies and supported by bank reserves; commodity-backed stablecoins are linked to physical assets like gold or silver; crypto-backed stablecoins are secured by a diverse range of cryptocurrencies and are often over-collateralized; and algorithmic stablecoins use algorithms and smart contracts to adjust their supply based on demand to maintain a stable price without real reserves asset.

What is the Best Type of Stablecoin?

The best type of stablecoin is crypto-backed stablecoins. Often over-collateralized, they enhance security and reduce value fluctuations. These decentralized stablecoins are accessible to all, aligning with cryptocurrency principles. Many distribute revenue from their reserves to users, allowing for passive income, and their transparent, verifiable reserves reduce reliance on centralized entities. A notable example is the USDA token from Angle.