A crypto collateralized stablecoin is a type of stablecoin that is backed by collateral in the form of cryptocurrency. The idea behind this type of stablecoin is to provide a stable value by pegging it to a fiat currency, such as the US dollar, while also taking advantage of the benefits of cryptocurrency.
To create a crypto collateralized stablecoin, a certain amount of cryptocurrency is deposited as collateral. This collateral is then used to issue the stablecoin, which can be traded on a blockchain network like Ethereum. The stablecoin's value is maintained by the collateral backing it, as the cryptocurrency collateral is held in reserve to ensure the stability of the stablecoin's value.
Classical examples of a crypto collateralized stablecoins include:
- MakerDAO (MKR): The MakerDAO system issues the Dai stablecoin, which is collateralized by a basket of cryptocurrencies including Ether (ETH), Basic Attention Token (BAT), and other ERC-20 tokens. The value of Dai is maintained through a system of over-collateralization, where the value of the collateral must exceed the value of the Dai issued.
- Synthetix (SNX): The Synthetix protocol allows users to mint synthetic assets, including a stablecoin called sUSD, using SNX tokens as collateral. The value of sUSD is maintained through a system of collateralization ratios and penalties for under-collateralization.
- BitUSD (BITUSD): BitUSD is a stablecoin issued on the BitShares blockchain that is collateralized by BitShares (BTS) tokens. The value of BitUSD is maintained through a system of over-collateralization, where the value of the collateral must exceed the value of the BitUSD issued.
One advantage of crypto collateralized stablecoins is that they can be more transparent than traditional fiat-backed stablecoins, as the collateral is held on a public blockchain network. Additionally, they can be more accessible, as they can be traded and exchanged in a decentralized manner without relying on traditional financial institutions. However, they also carry the risk of cryptocurrency market volatility, as changes in the value of the collateral can impact the stability of the stablecoin's value.