Crypto-Backed Stablecoin: Decentralization in Focus
Crypto-backed stablecoins aim to achieve decentralization by using other cryptocurrencies as collateral, typically managed by smart contracts on a blockchain.
Mechanism: Instead of fiat currency, these stablecoins are backed by a basket of cryptocurrencies. Due to the inherent volatility of crypto assets, a common practice is “over-collateralization.” This means that a user must deposit a value of cryptocurrency greater than the amount of stablecoin they wish to mint (e.g., depositing $150 worth of Ether to mint $100 worth of stablecoin). This buffer is designed to absorb price fluctuations in the underlying collateral and maintain the stablecoin’s peg. If the collateral value drops too low, it can be liquidated to maintain stability.
Examples:
Dai (DAI): Issued by MakerDAO, Dai is currently the largest and most prominent crypto-backed stablecoin by market capitalization. It was initially designed to be fully decentralized, backed by a variety of cryptocurrencies.
LUSD (Liquidity USD): Backed exclusively by ETH, LUSD aims for a more purely decentralized and immutable stablecoin.
Decentralization vs. Practicality: While designed for decentralization, the reality can be more complex. Dai, for example, has increasingly incorporated centralized fiat-backed stablecoins (like USDC, USDP, GUSD) and even US Treasuries into its collateral reserves to enhance stability and scalability. This introduces a degree of centralization, creating a hybrid model that balances the ideals of decentralization with practical stability needs.
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