Stablecoin

Last updated 2 years ago

Cryptocurrency-backed

Cryptocurrency-backed stablecoins are issued with cryptocurrencies as collateral, which is conceptually similar to fiat-backed stablecoins. However, the main difference between these two designs is that while fiat collateralization typically happens off the blockchain, the cryptocurrency or crypto asset used to back this type of stablecoins is done through blockchain, using smart contracts in a more decentralized fashion. In many cases, these work by allowing users to take out a loan against a smart-contract via locking up collateral, making it more worthwhile to pay off their debt should the stablecoin ever decrease in value. To prevent sudden crashes, a user who takes out a loan may be liquidated by the smart contract should their collateral decrease too close to the value of their withdrawal.

Significant features of crypto-backed stablecoins are:

The value of the stablecoin is collateralized by another cryptocurrency or a cryptocurrency portfolio,The peg is executed on-chain via smart contracts,

The peg is executed on-chain via smart contracts,

The supply of the stablecoins is regulated on-chain, using smart contracts,

The price stability is achieved through introduction of supplementary instruments and incentives, not just the collateral.

The technical implementation of this type of stablecoins is more complex and varied than the fiat-collateralized kind which introduces greater risks of exploits due to bugs in the smart contract code. With the tethering done on-chain, it is not subject to third-party regulation creating a decentralized solution. The potentially problematic aspect of this type of stablecoins is the value change of the collateral and the reliance on supplementary instruments. The complexity and non-direct backing of the stablecoin may deter usage, as it may be difficult to comprehend how the price is actually ensured. Due to the nature of the highly volatile and convergent cryptocurrency market, a very large collateral must also be maintained to ensure the stability.