Crypto-collateralised stable coins: More decentralized and more liquid
Instead of being backed by gold or dollars, crypto-collateralized stable coins are backed by reserves of another cryptocurrency.
Not only does this help achieve price stability, it also addresses the centralisation aspect of fiat-collateralised coins.
But now you may be thinking, being backed by a normal cryptocurrency can be unstable as they’re usually volatile?
While this is true, to counteract this, crypto-collateralised coins are often over-collateralised to absorb price fluctuations with the excess reserves.
The concept works like this…
To get one $1 stable coin, you deposit $2 worth of the collateral coin. That means, the stable coin is 200% collateralised, which creates a lot of leeway should the collateral coin drop in value.
So what crypto-collateralised stable coins are available right now?
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Two stable coins backed by ordinary cryptocurrencies
#1: BitShares – They were the first cryptocurrency to use this form of collateralisation. They use their native network currency (bitshares) as collateral to create market pegged assets such as BitUSD, BitCNY and BitGold.
Also, these assets can then be traded like derivatives to effectively increase the collateral. Today, BitShares is quite popular with a market cap of over $300 million.
#2: DAI – Developed by MakerDAO. Dai is pegged to USD but collateralised by well-known crypto Ethereum.
This means, users could generate the stable coin by locking up lots of ethereum in a smart contract. And if a user wants to access their collateral, they simply have to pay back the DAI debt, without relying on a third party institution. Alternatively, the reserves will be sold automatically if the collateral dips below a specified threshold.
MakerDAO and DAI have been criticized for being highly complex and untested model. This is mainly why DAI’s acceptance as a stablecoin has been quite slow – evident as it only has a market cap of $55million.