What Are the Different Types of Stablecoins and How Do They Work?

Not all stablecoins work the same way. Here's how the main types hold their value, and what the differences mean for you.

Not All Stablecoins Are the Same. Here's What Sets Them Apart.

Stablecoins are digital tokens designed to maintain a consistent value, most commonly pegged to a fiat currency like the US dollar. Unlike Bitcoin or other digital assets whose prices fluctuate freely with market demand, stablecoins are built around mechanisms that actively work to keep their value steady.

Most people encounter stablecoins through USDC or USDT and assume they all work the same way, but there are meaningfully different designs underneath. As the collapse of TerraUSD in 2022 demonstrated, those differences can determine whether a stablecoin holds up under pressure or fails entirely.

The Main Types of Stablecoins

There are three broad categories of stablecoin in use today, each with a different mechanism underneath.

Fiat-backed stablecoins

Fiat-backed stablecoins are the most common type. For every token in circulation, the issuer holds an equivalent amount in real-world assets, typically cash and short-term government securities. This reserve-backing is what keeps the token's value anchored to its target price. When a user redeems their tokens, the issuer draws on those reserves to honour the redemption.

USDC and USDT are the most widely used examples and together account for the vast majority of the $300 billion+ stablecoin market. How reliable a fiat-backed stablecoin is comes down to whether its issuer holds genuine, liquid reserves and publishes regular audits, giving users a way to verify that the backing is real and accessible.

Commodity-backed stablecoins

Commodity-backed stablecoins are pegged to a physical asset rather than a currency. Gold is the most common example, with tokens like PAX Gold (PAXG) designed so that each token represents ownership of one troy ounce of physical gold held in a vault.

Unlike fiat-backed stablecoins, these tokens are not dollar-stable. Their value moves with the price of the underlying commodity, meaning they carry a different kind of price risk to fiat-backed options. They are better understood as a way to hold exposure to a physical asset in digital form, rather than a tool for predictable, everyday transactions.

Algorithmic stablecoins

Algorithmic stablecoins attempt to maintain a peg using code and market incentives rather than held reserves. The idea is that the system automatically adjusts supply in response to price changes, keeping the token close to its target value without needing real-world assets to back it.

TerraUSD (UST) was the most prominent example of this model. In May 2022, a large sell-off triggered a loss of confidence in the system, and with no underlying reserves to absorb the pressure, the peg broke and the token lost nearly all of its value within days. The episode highlighted the structural vulnerability of relying on market incentives alone to maintain stability, and regulators in multiple jurisdictions have since moved to tighten oversight of this model.

How they compare

Type	Backed By	Examples	Main Risk
Fiat-backed	Cash and government securities	USDC, USDT	Issuer reserve transparency
Commodity-backed	Phyiscal assets (e.g. gold)	PAXG	Commodity price movement
Algorithmic	Code and market incentives	TerraUSD (defunct)	System confidence collapse

Which Type Do Most People Actually Use?

For everyday payments, transfers, and spending, fiat-backed stablecoins are the practical choice. They are the most liquid, the most widely accepted across exchanges and payment platforms, and increasingly subject to formal regulation. Frameworks like MiCA in Europe and the GENIUS Act in the US have introduced clearer standards around reserve requirements and issuer accountability, giving users greater confidence in how these tokens are managed.

Not all fiat-backed stablecoins are created equal, and the differences are worth understanding before committing to one. Checking whether reserves are regularly audited, whether the issuer is regulated in your jurisdiction, and whether the token is broadly supported across the platforms you use are all reasonable starting points. For a closer look at how USDC and USDT compare on these fronts, see our article USDC vs USDT: What's the Difference?

What This Means for Everyday Use

Knowing the type of stablecoin you are holding matters because the design determines the behaviour. Fiat-backed stablecoins are built for reliability and everyday use, which is why they dominate the market and form the foundation of most stablecoin payment infrastructure today.

DeCard supports both USDC and USDT, so you can spend your stablecoins at millions of merchants worldwide simply and directly. To get started, see our guide Spend Stablecoins Anywhere with DeCard.