Different types of stablecoins
In which we discuss the three different types of stablecoins
Stable Sis
12/21/20252 min read
After my last post on the intricacies of US bankruptcy law, I thought it would be good to go back to the basics for everyone who would like a bit more background. I would advise anyone who is brand new to stablecoins to read my About Stablecoins page. After you've done that, come back and keep reading. Let's start with the different types of stablecoins.
Broadly speaking, there are three different types of stablecoins:
Fiat backed stablecoins
Crypto backed stablecoins
Algorithmic stablecoins
Let's look at each of them in detail.
Fiat backed stablecoins
These are currencies that try to solve the problem of cryptocurrencies' inherent volatility by being backed by a tangible, "traditional", financial asset. The most common are US dollars, Euros, Treasury Bills and, of course, gold. All the issuers of these coins need to keep a 1:1 reserve. This means that if they want to issue 100 new coins, they need to have 100 USD added to their vault. This 1:1 reserve makes fiat backed stablecoins the safest option. Example of these currencies are USDC, which is backed by US Dollars; Qivalis (once it goes live), backed by Euros and Tether, which is backed by gold. The question of Tether's gold deserves its own post, and until that is solved we will group it under fiat backed stablecoins.
Crypto backed stablecoins
As the name suggests, these stablecoins are backed by other cryptocurrencies. To remediate the problem of cryptocurrencies being volatile, this kind of stablecoin must be overcollateralized. This means that if an issuer decides to mint 100 new coins, they need to hold in reserves more than the equivalent amount of 100 dollars in the asset of their choosing. How much more is up for debate. It depends on the cryptocurrency, or mix of cryptocurrency used for reserves and their volatility. This is the reason they are riskier than fiat backed stablecoins. Using them requires understanding of what kind of collateral is used and making an assessment of whether they are sufficiencly overcollateralised, given the (crypto)assets used for backing. This can go wrong. The latest and most egregious of these cases is sUSD dropping to $0.68 back in April 2025. The best known crypto backed stablecoins is Dai. It is interesting that since 2024, MakerDAO (now SkyProtocol) has started posting "traditional" assets as collaterals and now holds more than one billion dollars in reserves.
Algorithmic stablecoins
There is no asset backing algorithmic stablecoins. They are also not recognised as stablecoins by the existing regulation. The EU's MiCA regulation effectively bans them, while the U.S. GENIUS Act applies only to fully-reserved stablecoins. This means these are fully unregulated assets and everyone choosing to engage should do so carefully. Just like fiat backed and crypto backed stablecoins, they claim they can be redeemed at a 1:1 ratio against the chosen currency. The way they choose to do so is by letting the market arbitrage its way up or down to the magic 1:1 target. The arbitrage hinges on the fact that, no matter the coin's actual value, you will always be able to swap it for $1 worth of the actual (crypto)currency the coin is pegged to. If this sounds complicated it's because, unless you're a seasoned trader, it is. And the failures have been worse than crypto backed stablecoins. Terra's collpase led to between 45 and 60 billion of value destroyed in days.
Conclusions
The whole idea of stablecoins is that, at any point in time, they need to be 1:1 redeemable to their currency of choosing, be it USD, EUR or another one. How far each coin deviates from this, determines how stable it truly is.
Until next time,
Stable Sis