Not financial, legal, or tax advice. Stablecoins carry real risk despite their name. See the caveats below.
Stablecoins aim to hold a steady value, usually pegged to the US dollar, but they do it in three fundamentally different ways: backed by real fiat reserves, backed by other crypto assets, or held stable algorithmically without full collateral. The method matters enormously for how safe the peg actually is.
Three models
Fiat-backed stablecoins hold cash and cash-equivalent reserves matching the coins in circulation. Crypto-backed stablecoins are collateralized by other cryptocurrencies, usually over-collateralized to absorb price swings. Algorithmic stablecoins try to hold their peg through code and incentives rather than full reserves.
Collateral
The stronger and more liquid the backing, the more reliable the peg tends to be under stress. Fiat-backed models depend on the issuer actually holding and disclosing real reserves; crypto-backed models depend on collateral holding its value; algorithmic models depend on the mechanism working as designed, even in a panic.
Examples
USDT and USDC are the largest fiat-backed stablecoins. See USDT vs USDC for how they compare directly. Crypto-backed and algorithmic designs are smaller and considerably higher-risk by comparison.
Stability trade-offs
Fiat-backed coins generally offer the most predictable peg but require trusting an issuer's reserves and transparency. Algorithmic designs remove that trust requirement but have a documented history of failing under stress. See Are Stablecoins Safe for the fuller risk picture.