Types of Stablecoins

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Types of Stablecoins

Depending on the mechanism used to stabilize their value, stablecoins can be organized into three different buckets:

 

ALGORITHMIC STABLECOINS
Algorithmic stablecoins use algorithms and smart contracts to manage the supply of the tokens issued. The system will reduce the token supply if the price falls below whatever fiat currency it tracks through methods like burning or buybacks. If the price surpasses the value of the fiat currency, new tokens will be put into circulation to reduce the stablecoin's value.

 

CRYPTO-BACKED STABLECOINS
Crypto-backed stablecoins use other cryptocurrencies as collateral, and smart contracts to monitor the minting and burning of the coin. This is intended to make the process more reliable, since users can independently audit the contracts. Some of these crypto-backed stablecoins are also run by DAOs, where the community can vote on changes.

 

FIAT-BACKED STABLECOINS
Fiat-backed stablecoins use government-issued currency like the U.S. dollar as collateral. Users can convert from fiat into a stablecoin and vice versa at whatever the pegged rate is. And if the price of the coin falls below the underlying fiat, investors can use arbitration methods to bring the price back to a fixed rate — simultaneously purchasing and selling the same asset on different markets.

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