Stablecoins come in four types, sorted by what holds their price steady: fiat-collateralized, commodity-collateralized, crypto-collateralized, and algorithmic. Together they represent more than $312 billion in market value, with the two largest fiat-backed coins accounting for roughly 93% of the total. The category matters because the backing mechanism decides how a coin behaves during stress, what you actually own, and how federal regulators treat it.
Fiat-Collateralized Stablecoins
These are the dominant type and the simplest to describe. Each token is supposed to be backed one-for-one by traditional currency or equivalent liquid assets held in bank accounts and short-term government securities. The issuer holds reserves, publishes periodic reports, and destroys tokens when someone cashes out. When the system works, one token equals one U.S. dollar.
Reserve quality is the part most holders overlook. Cash, bank deposits, and short-term U.S. Treasury bills can be liquidated fast when redemption demand spikes. Portfolios stuffed with corporate bonds or less liquid instruments cannot. Under the GENIUS Act, signed into law in July 2025, issuers must now maintain 100% reserve backing with liquid assets like U.S. dollars or short-term Treasuries, and publish monthly disclosures of reserve composition.1The White House. Fact Sheet: President Donald J. Trump Signs GENIUS Act into Law
Watch the wording on those disclosures. Issuers frequently say their reserves are “audited,” but the reports they publish are almost always attestations. An attestation is a narrow, point-in-time check that reserve assets match outstanding tokens on a specific date. A full financial audit examines the entire balance sheet, tests internal controls, and reviews liabilities under oversight bodies like the PCAOB. Most major stablecoin issuers have never undergone one.
There is also a gap between the one-for-one promise and what retail holders can actually do. Most major issuers only allow direct redemption by verified institutional accounts. Tether requires a $100,000 minimum through a verified account. Circle limits its direct redemption service to institutions like exchanges, banks, and wallet companies. If you hold coins in a personal wallet, your route to dollars runs through a secondary market, usually a crypto exchange. That works in calm conditions. In a crisis, the secondary price can drift below a dollar because retail holders are competing to sell while direct redemption is reserved for large players.
Commodity-Collateralized Stablecoins
Some tokens are backed by physical commodities held in off-chain vaults instead of cash. Gold is the most common, with each token typically representing one troy ounce in professionally insured storage. These tokens give you exposure to the commodity without shipping, insuring, or storing metal yourself. The token price tracks the global spot price, so the dollar value moves with the market. A “stable” gold token is stable in ounces, not dollars.
Custodians store the metal in vaults that undergo regular inspections for purity and weight, and the issuer keeps a digital ledger that must match the physical inventory. If 200,000 tokens are in circulation, 200,000 ounces should be in the vault.
Regulatory jurisdiction here remains unsettled. The SEC has suggested that some stablecoins may qualify as securities depending on how they are structured and marketed, while the CFTC has asserted anti-fraud and anti-manipulation authority over tokens it treats as commodities.2U.S. Securities and Exchange Commission. Securing Digital Dollar Dominance: A Comprehensive Framework for Stablecoin Regulation and Innovation For gold-backed tokens, the answer often depends on whether the token is marketed as an investment or as an ownership claim on stored metal.
Crypto-Collateralized Stablecoins
Crypto-collateralized stablecoins use other digital assets as backing, managed by smart contracts on a blockchain. Because the collateral itself is volatile, the system demands over-collateralization. You might lock $150 in cryptocurrency to mint $100 in stablecoins, creating a 150% collateral ratio as a buffer against price drops.3Frontiers in Blockchain. What Are the Different Types of Stablecoins? A Breakdown – Section: 2.1 Basic Structure and Functionality of DAI No bank, no vault, no intermediary. The code runs the whole operation, and anyone can verify the reserves by reading the blockchain.
The tradeoff is liquidation. If the collateral’s market value falls below a set threshold, the smart contract automatically sells it to cover the debt. This happens without warning and without negotiation. You lose your collateral position and pay a liquidation penalty, which can run as high as 13 to 15% of the borrowed amount. The peg is protected, but at the individual vault owner’s expense. If you mint crypto-backed stablecoins, you need to actively watch your collateral ratio, especially during sharp downturns when liquidations cascade across the network.
Algorithmic Stablecoins
Algorithmic stablecoins hold their peg through software, with no collateral vault of any kind. The protocol expands and contracts token supply based on demand. When price rises above the target, new tokens are minted to push it down. When price drops below, tokens are removed from circulation.
Many designs use a dual-token model, sometimes called seigniorage shares. The stablecoin is paired with a secondary bond or governance token that absorbs volatility. When the stablecoin trades below a dollar, the protocol lets users buy the bond token at a discount and redeem it later for a dollar’s worth of stablecoins, giving speculators a reason to step in and prop up the price. When the stablecoin trades above a dollar, the protocol mints new stablecoins and distributes them to bond token holders, expanding supply.
The TerraUSD Collapse
The design’s fatal flaw was exposed in May 2022 when TerraUSD (UST) collapsed. Before the crash, Terra’s combined ecosystem had a market capitalization of roughly $50 billion. Large holders withdrew hundreds of millions from a lending protocol, triggering selling pressure on UST. As UST slipped below its peg, the protocol minted enormous quantities of the companion token LUNA to absorb the selling. The flood of new LUNA cratered its price, which further undermined confidence in UST, which triggered more LUNA minting. Within three days, both tokens were essentially worthless. When market confidence evaporates, an algorithm with no hard collateral has nothing to fall back on. Regulatory attention toward algorithmic designs sharpened considerably afterward.
How Each Type Can Break Its Peg
Every stablecoin, regardless of type, can lose its target price temporarily or permanently. This is called de-pegging, and it has happened even to the largest coins. In March 2023, USDC dropped below 90 cents on secondary markets after its issuer revealed $3.3 billion in reserves were trapped at the collapsing Silicon Valley Bank. DAI, a crypto-collateralized stablecoin that held USDC in its reserves, fell below 90 cents in sympathy. Trading volumes on decentralized exchanges surged past $20 billion that day, against normal volumes of $1 to $3 billion.4The Fed. Primary and Secondary Markets for Stablecoins
Vulnerabilities differ by type. Fiat-backed coins are exposed to traditional banking risk, as the USDC episode showed. Crypto-backed coins are exposed to cascading liquidations. Algorithmic coins are exposed to confidence spirals. Knowing which risk you carry is more useful than assuming “stablecoin” means “stable.”
Federal Regulation Under the GENIUS Act
Stablecoins operated in a regulatory gray zone for years. The GENIUS Act, signed on July 18, 2025, created the first dedicated federal framework.1The White House. Fact Sheet: President Donald J. Trump Signs GENIUS Act into Law The core requirements:
- 100% reserves in liquid assets like U.S. dollars or short-term Treasuries, with monthly public disclosures.
- Bank Secrecy Act compliance, including anti-money laundering programs, sanctions screening, and customer identification.
- Technical ability to freeze, seize, or destroy tokens when legally ordered.
- A ban on claiming that a stablecoin is backed by the U.S. government, federally insured, or legal tender.
- Priority for stablecoin holders’ claims over all other creditors if the issuer becomes insolvent.
Oversight scales to issuer size. Larger issuers fall under direct federal supervision regardless of charter type, while smaller state-chartered issuers may operate under state-level oversight. The SEC has separately signaled that yield-bearing stablecoins, those that pay interest or rewards to holders, may face additional securities-law requirements beyond the GENIUS Act.5U.S. Securities and Exchange Commission. Statement on Stablecoins
How the IRS Treats Stablecoins
The IRS classifies stablecoins as property, not currency.6Internal Revenue Service. Digital Assets This catches many holders off guard. Even though a stablecoin is designed to equal one dollar, selling it, swapping it for another cryptocurrency, or exchanging one stablecoin for a different stablecoin is a taxable disposition of property. You need to track your cost basis and report any gain or loss, even if the gain is a fraction of a cent per token. Across thousands of transactions, those fractions add up.
There is no de minimis exception that exempts small stablecoin-to-stablecoin swaps from reporting. Brokers may report certain stablecoin sales on an aggregate basis when individual transactions fall below a de minimis threshold, but that is a reporting convenience for the broker, not a tax exemption for you.6Internal Revenue Service. Digital Assets You still report all digital asset transactions on your return, whether or not they produce a taxable gain or loss.