Types of Stablecoins

Fiat-backed

The issuer holds reserves — typically cash and short-term government securities — and issues tokens against them. This is the dominant model by volume.

It depends on the reserves genuinely existing, being liquid enough to meet redemptions quickly, and the issuer and its banking partners remaining operational.

• Depends on issuer solvency and banking relationships.
• Transparency varies; attestations are not the same as a full audit.
• Direct redemption is often limited to verified institutional customers.

Crypto-backed

Tokens are issued against crypto collateral locked in smart contracts, deliberately over-collateralized because the collateral itself is volatile. If collateral value falls too far, positions are liquidated automatically.

• Collateral and rules are visible on-chain.
• Depends on liquidation working during sharp, fast market moves.
• Carries smart-contract and oracle risk.
• Capital-inefficient by design, since more value is locked than issued.

Algorithmic

These attempt to hold a peg through supply adjustment and incentives rather than holding equivalent reserves. Some are partially collateralized; purely algorithmic designs hold little or nothing behind the token.

The historical record is poor: the 2022 collapse of the TerraUSD design destroyed tens of billions of dollars of value within days when confidence in the mechanism broke.

A mechanism that depends on continued demand to remain stable can unwind rapidly when that demand disappears.

Comparing the dependencies

• Fiat-backed: trust the issuer and its reserves.
• Crypto-backed: trust the code, the collateral and the liquidation process.
• Algorithmic: trust that market participants keep behaving as the model assumes.
• All three: trust the network the token is issued on.

Sources

• Ethereum documentation — Stablecoins
• US Treasury — President's Working Group Report on Stablecoins