Types of stablecoins


Fiat backed stablecoins

Centralized and with a scale factor of 1, meaning that for each $1 you deposit as collateral, you get $1 worth of the stablecoin. These stablecoins are backed by actual fiat currencies like the US Dollar, and require centralized trusted off-chain partners and mediators like banks. These stablecoins have single points of failure: censorship risk (the stablecoins may be seized) and regulatory risk, which means that the third party entity requires trust from the users.


Algorithmic stablecoins

Decentralized in nature and their stability is based on trust in the governance token. Algorithmic stablecoin usually use endogenous collateral, and are oftentimes undercollateralized.


Failed: TerraUSD/ LUNA


Collateralized stablecoins

Decentralized and use exogenous collateral, meaning that the collateral that backs the stablecoin has a primary use-case that is separate from the stablecoin project. The amount of collateral determines the level of safety the stablecoin poses.


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