Categories and Properties of Stablecoins

Stablecoins encompass a diverse array of categories and properties, each tailored to achieve stability and serve various functions within the digital ecosystem. These categories can be classified based on factors such as stability model, governance, and collateral type. Let's delve into these aspects:​

1) Stability Models: Relative Stability and MethodsStablecoins manifest in two primary stability models:

• Relative Stability (Pegged/Floating): In this model, stablecoins maintain their value either by being pegged to an external asset or through a dynamic algorithmic mechanism. Pegged stablecoins, exemplified by DAI stablecoin, USDC, and USDT, tie their value to another asset, ensuring stability through direct correlation. Floating stablecoins, on the other hand, rely on intricate mathematical mechanisms to uphold a consistent buying power, as demonstrated by RYE stablecoin.

​2) Stability Method: Governed vs Algorithmic: Stability methods delineate how stablecoins are maintained. This can be categorized into governed or algorithmic:

• Governed Stability: Some stablecoins, such as USDC, USDT, and TUSD, rely on a governing body, whether a Decentralized Autonomous Organization (DAO) or a centralized entity, to oversee the minting and burning of tokens. These entities intervene through decision-making processes to ensure stability.

• Algorithmic Stability: Algorithmic stablecoins, represented by DAI, UST, FRAX, and RYE, utilize permissionless algorithms for token minting and burning, operating autonomously without human intervention. While some, like DAI, exhibit hybrid characteristics with both governance and algorithmic elements, others, like UST, predominantly rely on algorithmic mechanisms.

3) Collateral Type: Exogenous vs. EndogenousStablecoins are further categorized based on their collateral type:

• Exogenous Collateral (Anchored): Stablecoins like USDC maintain value through external collateral, such as the US Dollar. The collateral directly substantiates the stablecoin's value, enabling it to be redeemed at a one-to-one ratio to the Dollar.

• Endogenous Collateral (Reflexive): Stablecoins such as UST have collateral derived from within the protocol, as users deposit assets to mint new tokens. UST draws its collateral from Luna. In the event of a stablecoin failure, the distinction between endogenous and exogenous collateral becomes critical. If the underlying collateral's failure is linked to the stablecoin's failure, it's endogenous. Exogenous collateral, by contrast, is typically over-collateralized, ensuring stability even if the stablecoin experiences challenges.

In essence, stablecoins are a testament to the versatility of blockchain technology, accommodating different models and approaches to achieve the shared goal of stability in the ever-evolving digital financial landscape. Understanding these categories and properties empowers us to make informed decisions and navigate the intricate world of stablecoins.