The growth and consolidation of crypto markets has enabled another class of collateralised stablecoins, based purely on crypto assets.
This approach tries to reduce the reliance on companies and human behaviour, instead using smart contracts to manage stability in the system, This allows for purely on-chain stablecoins based on the value of the underlying cryptocurrency (or cryptocurrencies).
These stablecoins always require over-collateralised deposits in order to ensure that fluctuations in value of the underlying collateral won’t break the peg.
The peg is kept via carefully designed economic incentives, governed by community voting, and protected by an automated liquidation mechanism to keep the system’s value in balance.
Although it requires one to trust the underlying smart contracts, this kind of stablecoin system is designed to run without touching the traditional financial system..
The first and most prominent example of a crypto collateral-based stablecoin is DAI, the brainchild of crypto non-profit MakerDAO.
While at first Ether was the only cryptocurrency accepted as collateral, later iterations implemented a multi-collateral approach – meaning you can deposit many other Ethereum-based tokens as collateral.
| Pros | Cons |
| Crypto-native: the Stablecoin requires no interaction with traditional systems | Novelty: potential bugs in a smart contract may lead to loss of funds |
| Transparency: all transactions happen on-chain, and are auditable by anyone | Cost: over collateralised deposits can be expensive for some |
| Decentralised governance: smart contracts aren’t controlled by a single entity | Catastrophic drop: a black swan sudden collapse of prices may bypass safety liquidation mechanisms |
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