Stablecoins are a type of cryptoasset designed to have low volatility and maintain a stable market price to a reference currency or asset, such as USD (the most popular) or a unit of gold. Designs for maintaining stability vary considerably, ranging from asset-backed off-chain schemes to mechanisms that pursue stability through pure algorithmic operations.
Stablecoins are loosely categorized by the following characteristics:
Stability mechanisms - The pursuit of stability is achieved through collateral support or algorithmic operations.
Type of collateral - Collateral is either 1) directly linked 1-to-1, e.g., USD stablecoins backed by USD held by a custodian, 2) indirectly linked 1-to-1, e.g., a USD stablecoin that is backed by U.S. government bonds held by a custodian, 3) non-reference asset, e.g., DAI that is backed by an over-collateral supply of ETH or 4) endogenously created seigniorage shares.
Degree of collateral - To instill trust in the mechanism, a stablecoin is supported by a supply of collateral that is either smaller, equal, or larger than the combined stablecoin value.
Custody of collateral - The collateral backing the stablecoin is either held with trusted parties off-chain (usually non-digital assets such as USD with regulated custodians) or cryptoassets secured trustlessly on-chain.
Redemption features - The degree to which the stablecoin could be redeemed for the underlying collateral and is more relevant to off-chain collateral.