Stablecoins can be backed by bank deposits, cryptocurrency or nothing at all. The main types and how they differ.
The most common type is backed by reserves in ordinary money, bank deposits and short-term government securities. USDT and USDC are examples.
The model is easy to understand, but requires trust in the issuer and that the reserves actually exist.
Some stablecoins are backed by other cryptocurrency locked in smart contracts. The best known is DAI, today continued as USDS.
Because cryptocurrency fluctuates in value, there must be more collateral than the value of the stablecoins issued. If the collateral falls too much in value, it is sold automatically.
Algorithmic stablecoins try to keep their value stable with rules in the code, without real reserves. The best known, TerraUSD, collapsed in 2022 and wiped out large sums.
Since the collapse, this type has been seen as very risky. European rules make it difficult to offer such stablecoins.
Some tokens are backed by physical commodities, especially gold. Each token corresponds to a set amount of gold held by a custodian.
A newer type pays the holder a return, for example by placing the reserves in government securities and passing on the interest. Such tokens resemble tokenized money market funds and are often regulated as securities.