Four Stablecoin Types · Fiat, Crypto, Algo, Commodity

Family 01 · Fiat-backed

Peg mechanismThe issuer holds real-world reserves — typically cash deposits and short-dated government bonds — equal to or greater than the tokens in circulation. Holders can redeem tokens with the issuer for the underlying asset. Arbitrageurs keep the secondary-market price near peg because any meaningful gap is profitable to close.

Reserve compositionUSDC disclosures distinguish the Circle Reserve Fund from bank cash. USDT reports a broader mix that includes government instruments and other asset classes. Use each report's date and definitions before comparing proportions.

Primary failure modeCounterparty bank failure for a custodian holding part of the reserves (USDC and the SVB weekend in 2023), reserve shortfall (the historical NYAG concern with Tether before 2021), or regulator-forced wind-down (BUSD in early 2023 under NY DFS).

Where it worksSpot trading on centralised exchanges, cross-border payment, working capital, the default for any first-time stablecoin holder. The deepest liquidity by an order of magnitude over any other family.

Where it does notHolders who want fully on-chain transparency on every reserve unit; holders in jurisdictions where the regulator of the issuer is politically hostile; long-term holders who want diversification beyond a single issuer.

Scale comparisonA market-share figure needs a dated dataset and a definition of which tokens count. This guide compares mechanisms rather than presenting an undated share.

Family 02 · Crypto-collateralised

Peg mechanismCollateralised borrowing locks assets against debt under protocol-specific limits. Excess collateral provides a buffer, not guaranteed solvency. If prices fall, liquidation must still execute before that buffer is exhausted. Thresholds and liquidation methods differ by asset and protocol.

Reserve compositionFor DAI / USDS in 2026: a mix of ETH-staked positions (stETH and similar), USDC (which makes the design partly inherit USDC risk), various real-world-asset positions added since 2022 (tokenised T-bills, MakerDAO RWA vaults), and smaller positions in other crypto assets.

Primary failure modeCollateral price drop too fast for liquidation auctions to keep up (the "Black Thursday" March 2020 episode where DAI briefly traded above peg because liquidators could not get the keeper bots to fire); USDC contagion in the collateral mix (the March 2023 weekend caused DAI to depeg in sympathy); smart-contract risk in the underlying protocol.

Where it worksDeFi positions where on-chain transparency of collateral matters; holders philosophically aligned with decentralised governance; positions inside specific protocols (Maker / Sky native users, Aave borrow positions). LUSD remains the most "pure" version of the crypto-collateralised design (ETH-only collateral, no fiat-backed positions).

Where it does notFirst-time stablecoin holders looking for the simplest possible exposure; holders who want zero exposure to a smart-contract layer; cross-border payment use cases where receiver familiarity matters.

Scale comparisonCount distinct tokens and collateral arrangements carefully; DAI and USDS coexist, and a protocol may also hold fiat-backed coins.

Family 03 · Algorithmic

Peg mechanismThe token holds peg through code-based mint-and-burn arbitrage with a paired token, without (in the pure form) any exogenous collateral. When the stablecoin trades below peg, arbitrageurs burn it to mint the paired token at peg value and sell the paired token for profit. The mechanism is elegant in calm weather and structurally fragile in a coordinated run.

Reserve compositionA pure endogenous design lacks independent reserve assets. Hybrid designs vary and can change category. Current USDD documentation describes collateralised debt positions and liquidation; the old reserve basket should not be copied forward as its current mechanism.

Primary failure modeThe death spiral. Exits require newly minted units of the paired token; selling those units can push its price lower, requiring still more issuance for the next exit. Terra's UST and LUNA collapse in May 2022 illustrates this feedback loop.

Where it worksResearch and academic study. Pure algorithmic designs are not a holdings category in 2026.

Where it does notA cash-like holding requires scrutiny of redemption and independent backing. MiCA and the enacted GENIUS Act require product-specific legal analysis; an algorithmic label does not establish an exemption or permission.

Scale comparisonDefine whether the category includes collateralised and hedge-based hybrids before comparing its size. A legacy label can misclassify a redesigned token.

Family 04 · Commodity-pegged

Peg mechanismThe issuer holds one unit of the underlying commodity (typically one troy ounce of gold) for each token. Holders can redeem tokens for the physical commodity, usually with a fee and a delivery process. PAXG holds gold in LBMA-good-delivery vaults; XAUT similarly.

Reserve compositionThe issuer describes allocated commodity backing. Paxos publishes monthly PAXG reserve reports. For XAUT, consult its own allocation and report documents rather than assuming the same reporting cadence.

Primary failure modeThe commodity itself moves in price — PAXG tracks gold, not a fixed USD value, so the dollar-denominated price moves with the gold market. Counterparty risk on the vault custodian. Liquidity is meaningfully thinner than for fiat-backed stablecoins.

Where it worksHolders who want gold exposure with crypto-rail composability (lend gold-backed tokens, use as DeFi collateral, transfer cross-border without physical shipping). Inflation hedging when the holder's local currency is volatile and they prefer gold over fiat-backed stablecoins.

Where it does notAnywhere the user case requires a stable dollar value. Commodity-pegged tokens are not interchangeable with USDT or USDC for the typical crypto use case.

Scale comparisonGold-token market value moves with both token supply and gold prices. It is not directly comparable with dollar-token supply without explaining that difference.

The cross-family comparison

Dimension	Fiat-backed	Crypto-backed	Algorithmic	Commodity
Peg target	Single fiat (USD, EUR)	Single fiat (USD, EUR)	Single fiat (historically)	Commodity (gold, etc)
Reserve location	Off-chain, bank custody	On-chain smart contract	None (pure form)	Off-chain, vault custody
Verifiability	Attestations, periodic	On-chain in real time	Not applicable	Attestations, vault audits
Liquidity (2026)	Deepest	Moderate, DeFi-focused	Minimal	Thin
Primary risk	Counterparty bank, regulator	Collateral liquidation, smart-contract	Death spiral	Commodity-price, custodian
Stress lesson	USDC's SVB discount showed banking-access risk	DAI can inherit collateral-token stress	UST showed endogenous-collateral collapse	Market price can diverge from gold value when liquidity or redemption is constrained
Regulator status	Issuer and jurisdiction specific	Design and service specific	Mechanism does not determine legal treatment alone	Asset and jurisdiction specific
Yield source	Separate lending or rewards product, if any	Protocol-specific savings or lending terms	Incentives may be fragile	Gold backing alone pays no yield
Best for	Working balance, cross-border, first stablecoin	DeFi, philosophy	Research	Gold exposure with crypto rails

The history that explains why the categories settled here

2014-2018 · Fiat-backed dominates from the start

USDT launched in 2014 on the Omni Layer (later migrated to Ethereum, Tron and other chains). For four years it was effectively the only fiat-backed stablecoin with any market depth. The 2017 bull market produced the first major USDT controversies — questions about reserves, the relationship with Bitfinex, the role in BTC price formation. The questions did not slow USDT growth; the absence of alternatives kept the market concentrated.

2018-2020 · USDC enters; DAI grows; the framework forms

USDC launched in 2018 with a more regulated posture, immediately becoming the second-largest stablecoin. MakerDAO launched DAI in late 2017 with single-collateral (SAI), then migrated to multi-collateral (DAI) in November 2019. The framework of "fiat-backed vs crypto-collateralised" became clear; the algorithmic category was small and experimental.

2020-2022 · The algorithmic bubble

Iron Finance (TITAN), Empty Set Dollar, Basis Cash, Frax (initially partially-algorithmic) and several other algorithmic designs reached non-trivial size. Most experienced episodic instability. The defining event was Iron Finance's TITAN crash in June 2021, where the algorithmic stablecoin IRON traded below 0.75 and TITAN fell from 64 to near zero. The collapse was a clear pre-Luna warning; the market did not generalise the lesson.

May 2022 · Luna ends the algorithmic case

UST and Luna collapsed together. 60 billion of combined market cap erased. The contagion took down Three Arrows Capital, Celsius, Voyager and contributed to the FTX collapse later that year. The market for pure algorithmic stablecoins effectively closed. Hybrid designs continued but at lower market cap and with substantial collateral additions.

2022-2024 · Regulators codify what the market already learned

MiCA was adopted in 2023. Its stablecoin provisions apply from June 30, 2024 and its general application date is December 30, 2024, as set out in Article 149. The US GENIUS Act was signed on July 18, 2025, and Hong Kong's Stablecoins Ordinance took effect on August 1, 2025. Each framework has its own scope; an algorithmic mechanism does not exempt a token from legal analysis.

2024-2026 · Fiat-backed consolidation

Circle Internet Group completed its IPO in June 2025, as recorded in its second-quarter results. The listed parent acquired SEC reporting obligations; USDC itself is a token, not a listed company. Tether's reserve attestations and Circle's corporate filings cover different subjects and should not be treated as equivalent audits.

Examples that do not fit cleanly

USDe (Ethena) and the synthetic-dollar category

Ethena's USDe is commonly described as a synthetic dollar. Its hedge-based design uses assets and derivative positions to manage dollar exposure; it is not the UST mint-and-burn mechanism. Custody, exchange counterparties, hedge execution and funding costs need separate analysis. It should not be described as having no off-chain dependencies.

Tokenised Treasury products (BUIDL, USDY, OUSG)

BUIDL, USDY and OUSG are tokenised investment products with distinct legal terms, eligibility and distribution mechanics. Some accrue value and others distribute returns separately; they do not all express yield through a rising token price. Read the offering documents before treating any of them as interchangeable with a payment stablecoin.

RLUSD (Ripple) and the late-entrant fiat-backed category

Ripple's RLUSD launched in December 2024 as a NY DFS-regulated fiat-backed stablecoin. It sits in the same family as USDC and PYUSD but has narrower venue coverage as of mid-2026. Useful inside the Ripple / XRP Ledger ecosystem; less useful as a primary holding because of liquidity depth.

What the desk uses, by family

To put a working stake in the ground:

Fiat-backed working balance. The useful choice depends on the pair and exit route. A desk allocation would not establish an appropriate split for a reader.
Crypto-collateralised DeFi position. Small DAI position used in specific Aave borrow contexts and in MakerDAO's PSM module. Not a primary holding.
Algorithmic. Zero. The desk has held no algorithmic position since the Luna collapse. The category is not a holdings category.
Commodity-pegged. Small PAXG position as a gold proxy with crypto-rail composability. Not for stablecoin-equivalent use; classified as a commodity position in the portfolio.

If you only remember three things

Fiat-backed dominates because the trade-off (off-chain custody for on-chain liquidity) is the best fit for the dominant use case (working capital for crypto activity).
The "decentralised stablecoin" debate is partly philosophical: DAI inherits USDC risk through its collateral mix, which means the practical difference between a USDC position and a DAI position is smaller than the marketing suggests.
Algorithmic stablecoins are a category that the market has, in 2026, voted against. The regulators have codified the vote. New designs that claim to solve the algorithmic problem deserve careful reading; the historical track record of the category is not encouraging.

The four stablecoin types compared