A Comprehensive Guide to Stablecoins: Types, Risks, and the Future of Digital Money

digitado ⋅ 23 de February de 2026

What Are Stablecoins and Why Do We Need Them?

The Volatility Problem

Bitcoin can gain or lose 10% of its value in a single day. Ethereum swings wildly with market sentiment. This volatility makes cryptocurrencies excellent for speculation but terrible for:

Daily transactions
Store of value
Salary payments
Savings accounts
Anything requiring price stability

The problem: If you’re paid in Bitcoin on Monday, by Friday your salary could be worth 20% less—or 20% more. That’s not money, that’s gambling.

The Stablecoin Solution

Stablecoins solve this by maintaining a stable value, typically pegged to:

Fiat currencies (USD, EUR)
Physical assets (gold, commodities)
Algorithmic mechanisms
Real-world price observations

The goal: Create digital money that behaves like traditional currency—stable, predictable, usable in daily life—while retaining the benefits of blockchain technology.

The Four Types of Stablecoins

1. Fiat-Backed Stablecoins

How they work: For every stablecoin issued, the issuer holds an equivalent amount of fiat currency in reserve.

Examples:

USDT (Tether): Pegged to USD, backed by USD reserves
USDC (USD Coin): Pegged to USD, backed by USD reserves
BUSD (Binance USD):Pegged to USD, backed by USD reserves n

The mechanism:

1 USDT issued = $1 USD held in reserve

User deposits $100 → Receives 100 USDT
User redeems 100 USDT → Receives $100 USD

Pros:

Simple to understand: 1 coin = 1 dollar (or other fiat)
High liquidity: Easy to buy/sell
Widely accepted: Most exchanges support them
Strong value: Directly tied to fiat currency, so share the same stability as his referencial which is why strong fiat currencies are mainly used. n

Cons:

Centralization risk: Single entity controls reserves
Trust required: Must trust issuer holds reserves
Regulatory risk: Governments can freeze reserves
Audit concerns: Reserves may not be fully verified
Limited supply: Can’t exceed fiat reserves, stablecoin often force governments to emit new fiat reserves, creating debt
Treasury Debt Creation: Stablecoin already represent one of the highest source of the U.S. treasury debt.
Censorship possible: Issuer can freeze accounts n

Real-world issues:

Tether (USDT) has faced questions about reserve backing
Regulatory scrutiny increasing
Some issuers have frozen user funds n

Best for:

Trading and arbitrage
Quick value transfer
Users who trust centralized entities n

2. Asset-Backed Stablecoins

How they work: Backed by physical assets like gold, silver, or other commodities held in reserve.

Examples:

PAX Gold (PAXG): 1 PAXG = 1 fine troy ounce of gold
Tether Gold (XAUT): Backed by physical gold
Silver-backed tokens: Various projects n

The mechanism:

1 PAXG issued = 1 ounce of gold in vaultPrice fluctuates with gold market
User can redeem for physical gold (with fees)

Pros:

Tangible backing: Real assets in vaults
Inflation hedge: Gold historically maintains value
Transparency: Assets can be audited
Store of value: Unlike fiat, gold has intrinsic value
Decentralization potential: Less dependent on governments n

Cons:

Price volatility: Gold price fluctuates
Storage costs: Vaults cost money
Redemption complexity: Converting to physical assets
Limited scalability: Can’t exceed asset reserves
Custody risk: Assets must be securely stored
Not truly stable: Value follows underlying asset and the law of supply and demand n

Best for:

Long-term store of value
Inflation protection
Users wanting asset-backed security

3. Algorithmic Stablecoins

How they work: Use algorithms and smart contracts to maintain stability, often without direct backing.

Examples:

DAI (MakerDAO): Over-collateralized with crypto assets
FRAX: Fractional algorithmic stablecoin
UST (Terra): Failed in 2022, showing risks n

The mechanism (DAI example):

User locks $150 worth of ETH as collateral
Receives 100 DAI (worth $100)If ETH price drops, user must add collateral or face liquidation
System maintains 150%+ collateralization ratio

n Pros:

Decentralization: No single entity controls
Transparency: Smart contracts are auditable
No fiat reserves needed: Works with crypto assets
Censorship resistant: Can’t be frozen by governments
Programmable: Can add features via smart contracts n

Cons:

Complexity: Hard to understand for average users
Collateral risk: Underlying assets can crash
Liquidation risk: Users can lose collateral
Failure risk: Can depeg under extreme conditions (see UST)
Volatility exposure: Still tied to volatile crypto markets
High gas fees: Ethereum-based solutions expensive n

Real-world failures:

Terra UST (2022): Lost peg, collapsed from $1 to near $0
Iron Bank: Multiple depegging events
Various algorithmic coins: Many have failed

n Best for:
DeFi users comfortable with complexity
Users wanting decentralization
Advanced crypto users

4. Calibration-Based Stablecoins (The O Coin Approach)

How they work: Value is calibrated to real-world price observations rather than backed by reserves.

Example:

– O Coin: Calibrated to water price in each currency

The mechanism (O Coin):

1 O_USD = Average price of 1 liter of water in USD
1 O_EUR = Average price of 1 liter of water in EUR
One O currency per fiat currency, all representing the average cost of one liter of water in each fiat currency
Value determined by user measurements and online bots, not reserves
Unlimited supply possible (because not backed by physical asset)
Stability maintained through economic incentives

How O Coin maintains stability:

1. Water price measurement: Users and bots measure water prices globally per fiat currency

2. Calibration: Each O currency = 1 liter of water average price in each fiat currency

3. Exchange rate monitoring: System and users observes market exchange rates

4. Economic incentives: Unstable currencies generate coins for stable currency users

5. The principle: “The offender’s sanction is the reward of the offended”

Learn More at https://o.international n

Pros:

Unlimited supply: Not limited by reserves
Universal reference: Water is accessible everywhere humans live
No backing needed: Value from calibration, not assets
Decentralized measurement: Users validate prices and exchange rates
Stable referential: Based on basic human necessity, suppress inflation
Can fund Universal Basic Income: Unlimited supply without backing enables universal basic income
Can fund earth cleaning: No ROI needed, just stable value creation n

Cons:

New concept: Less proven than traditional approaches
Measurement complexity: Requires user participation
Adoption challenge: Needs critical mass of users
Understanding curve: More complex than “1 coin = 1 dollar”
Regulatory uncertainty: New model, unclear regulations n

Unique advantages:

Sovereignty: Each country keeps its currency name
No currency competition: All O currencies equally stable
Universal applicability: Works for all 142+ currencies
Purpose-built: Designed for UBI and earth cleaning n

Best for:

Universal basic income systems
Funding activities without ROI
Countries wanting currency stability without losing sovereignty
Long-term economic transformation n

Comparison Table: Stablecoin Types

The Stability Challenge: Why Stablecoins Fail

Common Failure Modes

1. Reserve Insufficiency (Fiat-Backed)

– Issuer doesn’t hold enough reserves

– Run on the bank scenario

– Users can’t redeem n

2. Asset Price Collapse (Asset-Backed)

– Gold price crashes

– Backing becomes insufficient

– Depegging occurs n

3. Death Spiral (Algorithmic)

– Market panic causes selling

– Algorithm can’t maintain peg

– Collapse (see Terra UST)

n 4. Measurement Failure (Calibration)

– Insufficient user participation

– Manipulated measurements

– Loss of calibration accuracy

The Trust Problem

Fiat-backed: Trust the issuer has reserves

Asset-backed: Trust the custodian has assets

Algorithmic: Trust the code works

Calibration: Trust the measurements are accurate

The question: Which trust model is most reliable? n

Real-World Examples and Lessons

Success Stories

USDC:

– Well-audited reserves

– Transparent reporting

– Regulatory compliance

– Lesson: Transparency builds trust

DAI:

– Survived multiple market crashes

– Over-collateralization works

– Decentralized governance

– Lesson: Conservative design matters

Failure Stories

Terra UST (2022):

– Lost peg in days

– $40+ billion lost

– Algorithm couldn’t handle panic

– Lesson: Algorithmic stability has limits

Iron Bank:

– Multiple depegging events

– Liquidity issues

– Lesson: Liquidity is critical

The Future of Stablecoins

Regulatory Landscape

Current state:

– Increasing scrutiny

– Reserve requirements

– Transparency demands

– Trend: More regulation coming

Impact:

– Fiat-backed: Most affected

– Algorithmic: May face restrictions

– Calibration: Unclear, new model

Innovation Directions

n 1. Hybrid Approaches

– Combining multiple mechanisms

– Fiat + algorithmic

– Asset + algorithmic

n 2. Better Decentralization

– Less reliance on single entities

– Community governance

– Transparent reserves

n 3. New Calibration Methods

– Beyond water price

– Multiple reference points, all human-validated and cross-country

– Real-world value observation eliminating inflation

n Choosing the Right Stablecoin

For Trading

– Best: Fiat-backed (USDT, USDC)

– Why: High liquidity, easy conversion

For Store of Value

– Best: Asset-backed (PAX Gold)

– Why: Inflation hedge, tangible backing

For DeFi

– Best: Algorithmic (DAI)

– Why: Decentralized, programmable

For Economic Transformation

– Best: Calibration-based (O Coin)

– Why: Unlimited stable supply without human trust or confidence, UBI and earth cleaning potential

For Daily Use

– Best: Fiat-backed or Calibration-based

– Why: Stability and usability

The O Coin Innovation: Calibration Without Backing

Why Calibration Matters

Traditional stablecoins are limited by their backing:

– Fiat-backed: Limited by reserves

– Asset-backed: Limited by assets

– Algorithmic: Limited by collateral n

The problem: You can’t fund universal basic income or earth cleaning if you’re limited by reserves. n The solution: Calibration-based stablecoins don’t need backing—they need accurate measurement.

How O Coin Works

1. Water Price as Universal Reference

– Water is accessible everywhere

– Basic human necessity

– Price reflects local economic conditions

– Universal but local

2. Unlimited Supply

– Not backed by physical asset

– Can create coins for UBI

– Can fund earth cleaning

– No reserve limitations

3. Economic Incentive Stability

– Unstable currencies generate coins for stable currencies

– Governments and individuals incentivized to maintain stability

– Self-correcting system

4. Sovereignty Preservation

– Each country keeps its currency name

– OUSD, OEUR, O_JPY, etc.

– No currency competition

The Vision

Traditional stablecoins: Digital version of existing money

O Coin: New money for new purposes

Use cases:

– Universal Basic Income

– Earth cleaning funding

– Economic equality

– Immigration reversal n

Conclusion: Understanding Stablecoins in Context

Stablecoins aren’t just “crypto dollars”—they’re experiments in digital money stability. Each type offers different trade-offs:

Fiat-backed: Simple but centralized

Asset-backed: Tangible but limited

Algorithmic: Decentralized but complex

Calibration-based: Unlimited but new

The future:

As cryptocurrency matures, we’ll likely see:

– More regulatory clarity

– Better transparency

– Hybrid approaches

– New calibration methods n

The key:

Understand what backs your stablecoin, who controls it, and what happens when things go wrong. Not all stablecoins are created equal, and the “stable” in stablecoin is a promise, not a guarantee.

Stability is based on the referential used and the volatility risk is associated to the volatility risk of the reference (fiat currency, Assets…)

For those interested in economic transformation:

Calibration-based approaches like O Coin offer something unique: the ability to create unlimited, stable currency for purposes that traditional economics can’t fund. Whether that’s universal basic income, earth cleaning, or other global challenges, the potential is significant.

The question isn’t whether stablecoins will succeed—it’s which approach will prove most reliable, useful, and transformative for humanity’s future.

References & Further Reading

– Stablecoin Market Analysis (various crypto research sources)

– Terra UST Collapse Analysis (2022)

– MakerDAO DAI Documentation

– Tether Reserve Reports

– O Blockchain Whitepaper (o.international)

– Stablecoin Regulation (various regulatory sources)

:::info
Note on Content: This article provides an educational overview of stablecoin types and mechanisms. DYOR.

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:::tip
This article is published under HackerNoon’s Business Blogging program.

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