Recently, someone asked me what types of stablecoins there are, and I realized that many people still don’t really understand this topic. In fact, the emergence of stablecoins solves a huge problem—cryptocurrency prices are too volatile to be used as everyday payment tools.

Imagine a merchant receiving payment in Bitcoin or Ether, only to find themselves losing money when the price drops right afterward. Stablecoins were created to address this pain point: by being pegged to fiat currencies, crypto assets, or commodities, they keep their prices relatively stable.

When it comes to the main types of stablecoins, the most common one in my view is fiat-collateralized/fiat-pegged stablecoins. USDT and USDC are classic examples. Behind them, there is support from the US dollar, and they are issued on a 1:1 basis. The biggest advantage of this type of stablecoin is high credibility—you know that each USDT corresponds to real US dollar reserves held in a bank.

But there’s another type of stablecoin worth paying attention to: those supported by crypto collateral. DAI is the best example. It doesn’t rely on banks or central institutions; instead, it is supported by crypto assets such as Ether, and it requires over-collateralization (for example, a 150% collateral ratio). That way, even if the ETH price fluctuates, DAI can remain stable. With a higher degree of decentralization, it’s more attractive to some people.

There is also a more special category: algorithmic stablecoins, with UST as the representative. They don’t need actual reserve assets to back them—instead, they rely entirely on smart contracts and algorithms to maintain price stability. It sounds cool, but the risks are also indeed greater. Once the algorithmic mechanism has a problem, the entire system could collapse.

So, overall, what options do you have with stablecoins? From the perspective of safety, fiat-pegged stablecoins are the most reliable. If you care about decentralization, crypto-collateral stablecoins are a good choice. If you want to try innovative mechanisms, you can look into algorithmic stablecoins—but be sure to do your homework. Different types have their own pros and cons, and the key is to choose based on your own needs.