Among them, the most popular one is the off-chain-backed stablecoins including USDT and USDC, which are issued and managed by a centralized organization and endorsed by financial assets such as U.S. dollars. Users can exchange fiat currencies for stablecoins and vice versa. Endorsed by real assets, there is generally little change in the off-chain-backed stablecoin prices which are affected by short-term supply and demand. However, as the management of these stablecoins is highly centralized, the transparency can not be ensured. For example, Tether Limited, the company behind USDT, has long been accused of being an opaque “unsecured money printing machine”, although it claims to have a 100% USD asset reserve for its USDTs.

👉On-Chain-Backed Stablecoin

While off-chain-backed stablecoin involves real assets, the remaining two types are more “pure” cryptocurrencies. On-chain-backed stablecoin is a digital currency issued to anchor the price of fiat currency by staking digital assets such as BTC and ETH (often over-collateralized) on smart contracts. DAI, published by Maker on Ethereum, falls into this category.

👉Algorithmic Stablecoin

Algorithmic stablecoins are pretty special in mechanism as their value isn’t supported. They maintain price by adjusting supply and demand through algorithms, much similar to a real-world central bank.

A typical example is AMPL, the first algorithmic stablecoins, which was launched in 2018. Algorithmic stablecoins control their supplies through open market operations, rebasing, and issuing secondary tokens. With no other value base and relying only on its own consensus support, algorithmic stablecoins have little resistance to price fluctuations caused by speculation.