Stablecoins can be broadly classified into the following categories based on their underlying collateralisation methods:
Fiat-Collateralised Stablecoins
These stablecoins are backed by a reserve of fiat currency, typically held in a bank account. For every stablecoin issued, an equivalent amount of fiat currency is held in reserve, ensuring that the stablecoin maintains its value. Popular examples include Tether (USDT), the first and most widely used stablecoin, pegged to the US dollar, and USD Coin (USDC), a stablecoin backed by US dollar reserves and regularly audited to ensure transparency.
Commodity-Backed Stablecoins
These stablecoins are pegged to the value of physical commodities. For example, Tether Gold (XAUt) is a stablecoin backed by gold reserves. The value of these stablecoins fluctuates with the market price of the underlying commodity, offering an alternative for users who prefer tangible assets as collateral.
Crypto-Collateralised Stablecoins
Crypto-collateralised stablecoins are backed by other cryptocurrencies. These stablecoins utilise smart contracts to lock up collateral, which can be volatile, to issue a stablecoin. An example is Dai, which is generated by locking Ethereum in a smart contract and minting Dai against it. This method allows for greater decentralisation but introduces risks associated with the volatility of the underlying cryptocurrency.
Algorithmic Stablecoins
Algorithmic stablecoins do not rely on collateral but use algorithms to control the supply of the stablecoin in response to market demand. When the price of the stablecoin deviates from its peg, the algorithm will either mint or burn coins to stabilise its value. This approach has seen mixed results, with several projects failing due to the complexities of maintaining price stability without collateral.