Fiat-collateralized Stablecoins: These are backed by traditional currencies like the U.S. dollar (e.g., USDT, USDC), held in reserve by a trusted entity. These stablecoins maintain a 1:1 peg with fiat currencies, offering relative stability.
Crypto-collateralized Stablecoins: These are backed by cryptocurrencies (e.g., DAI), but over-collateralized to manage volatility risks. Their decentralized nature makes them appealing but more complex.
Algorithmic Stablecoins: These rely on algorithms to control supply and demand, maintaining the peg without direct collateral. While innovative, they can face significant challenges, as seen with the collapse of TerraUSD (UST).
