Types of Stablecoins: Fiat-Backed, Crypto-Backed, and Algorithmic

Every stablecoin promises the same thing: a value that does not swing around like Bitcoin. What rarely gets explained is how that promise is kept, and that is where the differences that matter live. Some stablecoins are held up by cash sitting in a bank account. Some are held up by other crypto assets locked as collateral. And some are held up by nothing but code and the assumption that markets will behave rationally.

That last type once collapsed and erased tens of billions of dollars in under a week.

If you have read What Is a Stablecoin?, you already have the definition. This article goes one layer deeper: what actually backs a stablecoin’s value, why that difference matters before you park money in one, and how Indonesian regulation treats all three.

What separates one type from another

Stablecoins are grouped by the answer to a single question: what holds the price close to its reference value?

Think of a stablecoin as a parking ticket you can exchange for your car. The ticket has value because you believe the car is genuinely inside the building. If the car is there, the ticket is worth something. If the attendant merely promises that “the system will produce a car whenever someone redeems”, the ticket rests on something far more fragile.

The industry uses three main mechanisms:

• Fiat money and cash equivalents held by the issuer off-chain.
• Crypto assets locked in a smart contract at a value greater than the stablecoins issued against them.
• No collateral at all, relying on an algorithm that expands or contracts token supply to chase a target price.

The three fail in completely different ways. Before you store money in one, you should know which failure mode you are carrying.

Fiat-backed stablecoins

This is the most widely used type and the easiest to understand. The issuer takes fiat money from users, holds it as reserves, and mints an equal value of tokens on a blockchain. When a user wants fiat back, the tokens are burned and the money is returned.

How it works, simplified:

1. A user deposits Rp1,000,000 with a Rupiah stablecoin issuer.
2. The issuer holds the funds as reserves, typically as bank cash and short-term government securities.
3. The issuer mints 1,000,000 tokens to the user’s wallet address.
4. On redemption, the tokens are burned and Rp1,000,000 returns to the user’s bank account.

The best known global examples are USDT, issued by Tether, and USDC, issued by Circle, both pegged to the US dollar. For the Rupiah, IDRX uses the same model with IDR as its reference.

The advantages

The model is simple, and the peg is the easiest of the three to defend because there are real assets behind it. As long as reserves genuinely exist, stay liquid, and can be withdrawn, market arbitrage pulls the price back to the reference value whenever it drifts. This model is also the easiest to audit and the best fit for existing financial regulation, since regulators already know how to supervise institutions holding third-party funds.

The weaknesses

You have to trust the issuer. That is the heart of it. Reserves sit in the real world, in banks that can collapse, in instruments that can lose value, managed by companies that can mismanage them.

March 2023 showed this risk in action. USDC lost its peg and traded well below one dollar after Circle disclosed that part of its reserves sat with Silicon Valley Bank, which regulators had just closed. The peg recovered once deposit protection was confirmed, but over that weekend USDC holders were carrying bank risk, not crypto risk.

Another risk gets overlooked: issuers of fiat-backed stablecoins generally have the ability to freeze specific wallet addresses. That is a compliance feature regulators ask for, and it also means your tokens are never entirely free of third-party control.

What you should examine in a fiat-backed stablecoin is the composition of its reserves, who audits them, how often reports are published, and whether redemption is genuinely open to ordinary users or only to institutional partners.

Crypto-backed stablecoins

This type swaps fiat reserves for crypto assets locked in a smart contract. Because crypto prices move, the collateral has to be excessive. To issue 100 dollars of stablecoins, a user might need to lock 150 dollars or more in crypto. That gap is the cushion against price declines.

The best known example is DAI, a dollar stablecoin developed in the MakerDAO ecosystem. Users lock assets such as ETH as collateral, issue DAI against them, and reclaim the collateral by returning the DAI plus a fee.

What makes this model appealing is that all the collateral is visible to anyone on-chain. There is no monthly report from an accounting firm to take on faith, because the collateral position is open at all times. The model also does not depend on banks, so it does not go down with them.

The cost shows up elsewhere. It is capital-inefficient, since you must lock up more value than you receive. If collateral prices fall past a threshold, your position is liquidated automatically, and on a bad market day mass liquidations can hit at once. The system also depends on oracles, the services that feed off-chain price data on-chain. A wrong price from an oracle can trigger liquidations that should never have happened.

The irony is that most crypto-backed stablecoins are pegged to the US dollar, and some of their own collateral now consists of fiat-backed stablecoins. The claim of being free from the banking system does not fully hold in practice. Collateral composition changes over time, so check the current data directly before drawing conclusions.

Algorithmic stablecoins

The third type holds no collateral at all, or only a fraction. Stability comes from an algorithm that manages token supply. When the price rises above target, the system expands supply to push it down. When the price falls below target, it contracts supply or offers incentives for people to buy.

In theory this is elegant. Central banks also manage money supply. The difference is that a central bank has foreign exchange reserves and state authority, while an algorithmic stablecoin has code and the hope that someone will always be willing to buy on the way down.

The real test came in May 2022. TerraUSD, or UST, was an algorithmic stablecoin pegged to the dollar and maintained through a swap mechanism with the LUNA token. When UST began losing its peg, that mechanism minted enormous quantities of LUNA to absorb the selling pressure. LUNA’s supply exploded, its price fell close to zero, and rather than rescuing UST, the mechanism accelerated the collapse. Within days, tens of billions of dollars in value were gone, and retail investors took most of the damage.

One factor made it worse: the very high yield the Anchor protocol paid to UST depositors. That yield pulled in large sums of money with no other reason to stay. Once confidence wavered, the money left all at once.

Algorithmic stablecoins work while markets are calm, then fail precisely when you need stability most. For storing value or settling business payments, this type does not belong in the conversation. If you come across a project describing itself as algorithmic today, treat it as a financial experiment rather than somewhere to keep working capital.

Other types beyond the main three

The three-way split is useful for learning, but reality is messier. A few other categories you will run into:

• Commodity-backed, collateralized by a physical commodity such as gold. PAX Gold is one example, where a token represents a quantity of gold held in a vault. Its value is stable against gold rather than against a currency, so its price in Rupiah still moves.
• Hybrid models, combining partial real collateral with partial algorithmic mechanics. Several projects that once used this design moved to full collateralization after the Terra collapse.
• Yield-bearing stablecoins, which pass part of the income from their reserves to token holders. This structure raises regulatory questions of its own, since in many jurisdictions a product that pays a yield can fall under securities rules.

If a stablecoin is hard to place in any category, read its documentation more carefully before using it.

Comparison table

Aspect	Fiat-backed	Crypto-backed	Algorithmic
What backs the value	Cash and securities in the real world	Crypto assets locked in a smart contract	Nothing, only a supply mechanism
Collateral ratio	Roughly 1:1	Above 1:1 (over-collateralized)	Zero or a small fraction
Transparency	Depends on periodic reports and audits	Directly visible on-chain	Open code, but no assets to inspect
Main failure point	Issuer, custodian bank, reserve quality	Falling collateral prices, oracle failure	Loss of market confidence
Track record in a crisis	Has depegged, generally recovered	Held up, with waves of liquidations	Has collapsed entirely
Fit for business settlement	Best suited	Limited	Not advisable
Fit with regulatory frameworks	Easiest to map	Complex, issuers often lack a clear legal entity	Difficult, as there are no assets to supervise

How to assess a stablecoin before using it

Knowing the type is not enough on its own. Two fiat-backed stablecoins can differ enormously in quality. Questions worth asking before you store funds:

1. What backs the value, and can you verify that backing without relying on the issuer’s own claims?
2. Who audits it, how often are reports published, and are those reports publicly accessible?
3. How does redemption work, how long does it take, what does it cost, and is it open to retail users?
4. Who is the issuer, what legal entity is it, in which jurisdiction, and under which supervisor?
5. How has it behaved in turbulent markets? A depeg history tells you more than marketing material.
6. How deep is its liquidity where you would exit? A technically sound stablecoin with thin liquidity is still a problem when you need to get out.

For business use in Indonesia, one more question applies: does its reference value match your reporting currency? Using a dollar stablecoin for transactions booked in Rupiah adds currency risk to an operation that should have no foreign exchange exposure at all. The full reasoning is in Why Does Indonesia Need a Rupiah Stablecoin?.

How Indonesian regulation treats these types

Indonesian regulation does not yet distinguish between them.

The legal framework for crypto assets in Indonesia sits in Law No. 4 of 2026 on the Amendment to Law No. 4 of 2023 on the Development and Strengthening of the Financial Sector. The law places crypto assets within the broader category of digital financial assets, transfers their regulation and supervision to the Financial Services Authority (OJK), and requires business licensing for the parties operating in the sector.

The word “stablecoin” appears in the Elucidation of Article 213 paragraph (1) letter h, in a list of digital financial asset activities covered by financial sector technology innovation. It states that stablecoins may be used as a means of transaction after obtaining a recommendation from the exchange and approval from OJK. The same Elucidation states:

Stablecoin tidak dapat digunakan sebagai alat pembayaran secara langsung. Penggunaan stablecoin sebagai alat transaksi tidak dimaknai sebagai alat pembayaran.

Unofficial translation: “Stablecoins may not be used directly as a means of payment. The use of stablecoins as a means of transaction is not construed as a means of payment.” The Indonesian text is retained above because the law has no official English version.

That statement is consistent with Law No. 7 of 2011 on Currency, which establishes the Rupiah as the sole legal means of payment within Indonesian territory. A Rupiah stablecoin does not replace the Rupiah and is not intended to. Its place is as a means of transaction within the digital asset ecosystem, not as a substitute for cash at a shop counter.

Note also that the text speaks about stablecoins in general. There is no distinction between fiat-backed, crypto-backed, and algorithmic. There is nothing on reserve composition, audit obligations, or minimum collateral ratios. Technical substance of that kind is delegated to implementing regulations at the OJK and Bank Indonesia level.

So the question of which type of stablecoin may circulate in Indonesia has no final answer at the level of the law itself. What is settled is that operators must be licensed, their activities require regulatory approval, and no type of stablecoin may be positioned as a means of payment.

An Elucidation explains the norms in the main body of a law and does not create new ones. The firmer basis for licensing obligations remains the main body, while the Elucidation helps clarify its intent. Rules in the digital asset space are also moving quickly, so check the current regulations before making business decisions.

Where IDRX sits

IDRX is a fiat-backed stablecoin referenced to the Rupiah and pegged 1:1 to IDR. Its reserves consist of fiat funds and government securities, and the security of its smart contracts has been assessed by CertiK.

Of the three types covered here, only fiat-backed fits the needs of business settlement and the supervisory framework taking shape in Indonesia. The crypto-backed model is hard to account for to a regulator because its collateral moves, and the algorithmic model has already demonstrated why it should not hold working capital.

Reserve details, transparency reports, and technical documentation for IDRX are available at docs.idrx.co.

Conclusion

The difference between fiat-backed, crypto-backed, and algorithmic comes down to a question of who or what you trust. With a fiat-backed stablecoin, you trust the issuer and the bank holding its reserves. With crypto-backed, you trust the smart contract, the adequacy of the collateral, and the oracle feeding it prices. With algorithmic, you trust that the market will keep trusting, an assumption that has already failed expensively.

No type is free of risk. The risks simply take different shapes, and differ in how easily an outsider can inspect them. A stablecoin worth using is one that lets you check its risks yourself.

For everyday use and business operations in Indonesia, the question narrows on its own. You need value that is stable against the Rupiah, reserves you can verify, an issuer subject to supervision, and a clear redemption process. Fiat-backed with a Rupiah reference meets those criteria, and the rest comes down to choosing an issuer willing to open its books.

FAQ

Which type of stablecoin is safest? Fiat-backed has the best track record for everyday use, but its safety depends on the quality of the issuer. A fiat-backed stablecoin with opaque reserves can be riskier than a crypto-backed one whose collateral is plainly visible on-chain.

Do algorithmic stablecoins still exist after the Terra collapse? A few projects still use algorithmic elements, but most have shifted to full or partial collateralization. The purely uncollateralized model lost almost all market confidence after May 2022.

What is the difference between over-collateralized and fully backed? Fully backed means the collateral matches the tokens issued, roughly one to one. Over-collateralized means the collateral exceeds the tokens issued, usually because the collateral itself is a volatile asset.

Why can a fiat-backed stablecoin lose its peg? The peg can wobble when the market doubts the issuer’s ability to meet redemptions, for instance because of trouble at the bank holding reserves or because exchange liquidity dries up. The USDC case in March 2023 is the example, and its peg recovered once the uncertainty cleared.

Can stablecoins be used to pay for goods in Indonesia? Not as a means of payment. Law No. 7 of 2011 establishes the Rupiah as the sole legal means of payment, and the Elucidation of Article 213 paragraph (1) letter h of Law No. 4 of 2026 states that stablecoins may not be used directly as a means of payment. Use as a means of transaction within the digital asset ecosystem is a separate matter.

Are all Rupiah stablecoins necessarily fiat-backed? Not automatically. The reference value and the collateral mechanism are two separate things. A Rupiah-referenced stablecoin using crypto collateral is technically possible. Check the issuer’s documentation rather than inferring from the product name.

Are stablecoins specifically regulated in Indonesia? The general framework is in Law No. 4 of 2026, which places crypto assets under OJK supervision and requires business licensing. Technical provisions specific to stablecoins, including reserves and audits, are delegated to implementing regulations whose status you should verify separately.

References

• Law of the Republic of Indonesia No. 7 of 2011 on Currency. Official text available via JDIH, peraturan.go.id.
• Law of the Republic of Indonesia No. 4 of 2026 on the Amendment to Law No. 4 of 2023 on the Development and Strengthening of the Financial Sector, particularly Article 213 and its Elucidation, and Article 221A. Official text available via JDIH, peraturan.go.id.
• Law of the Republic of Indonesia No. 4 of 2023 on the Development and Strengthening of the Financial Sector. Official text available via JDIH, peraturan.go.id.
• Financial Services Authority (OJK), information and regulations on digital financial assets, ojk.go.id.
• Bank Indonesia, provisions on payment systems and financial sector technology innovation, bi.go.id.
• IDRX, technical documentation and transparency reports, docs.idrx.co and idrx.co.

Disclaimer

This article is educational and is not a solicitation to buy, sell, or hold any digital asset. Digital assets carry risk, including the risk of losing value. The legal provisions quoted here can change and may be interpreted differently, so consult the official text of the regulations and a qualified adviser before making any decision. Do your own research.

Keep learning

Having covered the types of stablecoins, the next step is the mechanics in detail, in How a Rupiah Stablecoin Works: Peg, Backing, and Minting. For the fundamentals, go back to What Is a Stablecoin?. Follow @idrx.co for new academy material.