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Table of Contents Stablecoins: Definition, How They Work, and Types By Adam Hayes Updated December 02, 2025 Reviewed by Doretha Clemon Fact checked by Vikki Velasquez Part of the Series What Investors Need to Know About Altcoins Key Takeaways
Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging to fiat currencies, commodities, or financial instruments, aiming to offer a less volatile alternative to cryptocurrencies like Bitcoin.
There are four primary types of stablecoins: fiat-collateralized, commodity-backed, crypto-collateralized, and algorithmic.
Each employs different mechanisms to maintain price stability; many can be found through top crypto exchanges. Despit…
Investopedia Trade
Table of Contents Stablecoins: Definition, How They Work, and Types By Adam Hayes Updated December 02, 2025 Reviewed by Doretha Clemon Fact checked by Vikki Velasquez Part of the Series What Investors Need to Know About Altcoins Key Takeaways
Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging to fiat currencies, commodities, or financial instruments, aiming to offer a less volatile alternative to cryptocurrencies like Bitcoin.
There are four primary types of stablecoins: fiat-collateralized, commodity-backed, crypto-collateralized, and algorithmic.
Each employs different mechanisms to maintain price stability; many can be found through top crypto exchanges. Despite their potential benefits, investors should be cautious. Stablecoins involve third-party auditors for verification of reserves, which introduces risk in a system aiming to minimize third-party reliance.
Regulatory scrutiny of stablecoins is increasing worldwide due to their growing market impact, with various jurisdictions implementing measures to ensure they are backed by adequate reserves. Tether (USDT) is the most widely used stablecoin, consistently ranking as one of the top cryptocurrencies by market capitalization, pegged to the U.S. dollar with a 1:1 backing. 1
Both USDC and USDT are classified as fiat-collateralized stablecoins. This means their value is pegged to a fiat currency (in this case, the U.S. dollar) and backed by reserves of cash and cash equivalents, such as short-term U.S. government treasuries, held by the issuing entities.
PAX Gold (PAXG): Each PAXG token represents one fine troy ounce of a physical gold bar stored in London vaults. It is issued by the Paxos Trust Company and is fully regulated and audited monthly. Tether Gold (XAUT): Each XAUT token represents ownership of one troy ounce of physical gold that is securely stored in a Swiss vault. Kinesis Gold (KAU) and Kinesis Silver (KAG): These tokens are backed by physical gold (1 gram per KAU) and silver (1 troy ounce per KAG) respectively, stored in insured vaults. Digix Gold Token (DGX): This token was designed to be backed by 1 gram of physical gold, though the project’s operations have largely ceased.
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