The kinds of stablecoins are different in their backing from different assets. The most commonly used types include fiat-backed stablecoins and commodities-backed and algorithms-backed stablecoins. Let's now look at these three types in greater detail to better understand:
1. Fiat currencies Backed Stablecoins
The most popular and widely utilized method is to make use of fiat currency or cash equivalents to help support every stablecoin on the same amount. The most simple method of connecting the value of a coin with the U.S. dollar is to provide it with an equivalent quantity of reserves that are held in the bank account. It means that the account of the issuer's U.S. bank accounts are stored in reserve equivalent to one USD per stablecoin that is in circulation. The issuer offers its customers an opportunity to deposit dollars to the same amount of tokens.
2. Algorithmic Backed Stablecoins
The aim to use algorithmic stablecoins providing an uncentralized system that utilizes different outside-of-the-chain as well as within-the-chain processes to mimic the dollar. They may employ an approach to fractional reserve, or some other assets may not be backed by these coins. It's very risky to invest in cryptographic coins. Many popular ones have been unsuccessful (most recently, Terra). They haven't proven themselves to be solid and stable that they are widely accepted by investors so far.
3. Commodity stablecoins backed by a stable currency
Instead of algorithmsic stablecoins are backed by variable assets like precious metals. The gold bar is by far the most frequently used asset to back these stablecoins. Some stablecoin issuers like Daxos Gold and Kitco Gold are planning to take their currency out using gold bars.
4. Crypto-backed Stablecoins
Crypto-collateralization, a method by which assets of other cryptocurrencies back stablecoins, is another comparable technique for preserving a stablecoin's price peg. The stablecoins that are crypto-backed tend to be over-collateralized since cryptocurrencies are less volatile than traditional currency.
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