Stablecoin Types: An Evolutionary History

Stablecoins have become one of the most important innovations in the digital asset ecosystem. With a combined market capitalization surpassing $250 billion in early 2025, they have established themselves as the premier medium of exchange, settlement, and collateral across CeFi and DeFi. But not all stablecoins are built the same. Over the years, developers, institutions, and communities have experimented with various models, each with its own benefits, limitations, and risk profiles.

At a high level, stablecoins fall into three main categories: fiat-backed, crypto-backed, and algorithmic. These designs reflect differing answers to the same challenge—how to maintain a stable value on-chain. Let’s examine the differences, historical lessons, and where the innovation frontier is headed today.

The Three Types of Stablecoins

1. Fiat-Backed Stablecoins (Exogenous Collateral)

Fiat-backed stablecoins are the most straightforward and dominant type in the market today. These tokens are backed 1:1 by real-world fiat currency reserves—usually held in bank accounts or short-term government securities like U.S. Treasuries. Examples include USDC, USDT, PYUSD, and RLUSD. Their stability comes from exogenous assets that exist outside the crypto ecosystem, making them reliable but dependent on traditional financial infrastructure and regulatory oversight.

With the rise of branded stablecoins issued by companies like PayPal and Ripple, and upcoming entrants from corporations like Amazon and Walmart, fiat-backed models continue to lead due to their regulatory clarity, scalability, and user trust.

2. Crypto-Backed Stablecoins (Exogenous Collateral)

Crypto-backed stablecoins use on-chain digital assets as collateral, typically overcollateralized to account for volatility. The most notable example is DAI, issued by MakerDAO, which is backed by assets like ETH, stETH, and USDC. These stablecoins are exogenously collateralized as well—just like fiat-backed—but rely on decentralized governance and smart contracts for issuance and redemption rather than centralized custodians.

Over time, crypto-backed models have expanded into more experimental forms, such as meta-stablecoins (e.g., tokens backed by baskets of other stablecoins), yieldcoins (e.g., staked or yield-generating stablecoins like lvlUSD and scUSD), and delta-neutral synthetic dollars (e.g., Ethena’s USDe), which are constructed using complex hedging strategies. These innovations aim to maximize capital efficiency and decentralization while avoiding the fragility of purely algorithmic models.

3. Algorithmic Stablecoins (Endogenous Collateral)

Algorithmic stablecoins attempt to maintain their peg using endogenous mechanisms—primarily supply-demand feedback loops, mint-and-burn incentives, and native governance tokens. These models do not rely on exogenous collateral, but instead use their own ecosystem tokens to balance supply and stabilize price.

The most infamous example is TerraUSD (UST), which collapsed in 2022 after losing its peg and triggering a $40B+ implosion of the Terra ecosystem. Its failure severely damaged confidence in endogenous-only designs. Even Frax, which originally launched as a partially algorithmic stablecoin, has since transitioned into a fully fiat-backed model (frxUSD), abandoning endogenous peg mechanisms in favor of transparency, auditability, and regulatory alignment.

Since then, algorithmic stablecoins have largely died out, viewed as theoretically elegant but practically unproven and dangerously unstable under stress.

The Stablecoin Trilemma

At the heart of stablecoin design lies the stablecoin trilemma: the impossible triangle of price stability, capital efficiency, and decentralization. Most designs can only optimize for two:

• Fiat-backed coins are stable and capital efficient, but not decentralized.

• Crypto-backed coins are stable and decentralized, but not capital efficient.

• Algorithmic coins aim to be capital efficient and decentralized, but struggle with long-term price stability.

Understanding this trilemma has driven the evolution of stablecoin models over time, with designers seeking new ways to rebalance the tradeoffs.

A Brief History of Stablecoin Evolution (2018–2025)

• 2018–2020: The era of fiat-backed stablecoins, led by USDT and USDC. Trust in banking infrastructure, ease of use, and regulatory simplicity drove adoption.

• 2020–2021: The rise of crypto-backed stablecoins like DAI and innovations in overcollateralized lending. DeFi summer brought demand for decentralized liquidity.

• 2021–2022: The experiment with algorithmic stablecoins, peaking with Terra’s rapid growth—and subsequent collapse in mid-2022.

• 2023–2024: A return to fundamentals. Most projects pivoted back to exogenous backing. Frax removed algorithmic components; DAI became more centralized with increased USDC collateral.

• 2024–2025 & Beyond: A new wave of stablecoin innovation is emerging:

  • Meta-stablecoins, backed by baskets of fiat and/pr DeFi-native stablecoins, including stablecoin lending deposits and liquid-staked stablecoins

    • Ex: lvlUSD (Level), scUSD (Treevee), reUSD (Resupply)

  • Synthetic dollars, backed by delta-neutral cash & carry strategies

    • Ex: USDe (Ethena), USR (Resolv)

  • Yieldcoins, enabling stablecoin liquid staking for yield opportunities

    • Ex: sUSDe (Staked USDe), stUSR (Staked USR), slvlUSD (Staked lvlUSD)

  • Demand-centric stablecoins, using reserve yield to subsidize borrowing costs

    • Ex: dUSD (dTRINITY)

  • Branded corporate stablecoins, launched by traditional institutions & enterprises—fully-backed and regulated

    • Ex: PYUSD (PayPal), JPMD (JPMorgan Chase)

This evolution reflects a broader industry realization: pure algorithmic stability is not feasible without real backing. Future innovation is focused on enhancing fiat- and crypto-backed models by improving yield design, risk management, and composability.

Looking Forward

Today, the stablecoin landscape is more dynamic than ever. While algorithmic stablecoins have largely fallen out of favor, the industry continues to push the boundaries of fiat-backed and crypto-backed models, incorporating hybrid collateral structures, smart contract automation, and innovative yield strategies. Crucially, regulatory clarity is now catching up with technological innovation. The passage of the GENIUS Act and STABLE Act in the U.S. is laying the foundation for a compliant, scalable framework for fiat-backed stablecoins—providing institutions with the legal certainty they need to enter the space.

This new regulatory environment is accelerating the rise of corporate-branded stablecoins, as traditional enterprises recognize the strategic benefits of issuing their own digital dollars. With the help of Stablecoin-as-a-Service (SCaaS) providers, businesses can now launch fully compliant, fiat-backed stablecoins in just weeks—retaining control over their brand, their customer experience, and even their share of reserve earnings. As programmable money becomes the backbone of digital commerce, branded stablecoins are poised to become as essential to enterprise infrastructure as websites and mobile apps once were.

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About Stably

Founded in 2018, Stably is a leading stablecoin development and advisory firm from Seattle, Washington. It is among the earliest issuers and Stablecoin-as-a-Service solution providers in the world, operating the 7th largest stablecoin at one point in 2019. Stably has launched over 15 stablecoins since 2020, with clients and partners ranging from financial institutions to Web3 organizations. The company helps B2B clients adopt stablecoin technology and launch compliant products for their own ecosystems—unlocking new user benefits and market opportunities from branded digital money.

For inquiries or to learn more, please visit stably.io or contact hello@stably.io.