What Is the Difference between Fiat-Backed and Seigniorage-Based Stablecoins?

Fiat-backed stablecoins are centralized and hold an equivalent amount of fiat currency (like USD) or cash equivalents in a bank account for every token issued. Seigniorage-based stablecoins are decentralized and use an algorithmic mechanism involving a volatile token to maintain the peg without any traditional asset backing.

The former relies on trust in the custodian; the latter relies on the algorithm's economic incentives.