Overview
A crypto-backed stablecoin is issued against crypto collateral, often over-collateralized to absorb price swings. MakerDAO's DAI is the canonical example. The collateral is held on-chain and visible to anyone.
How It Works
Users lock crypto as collateral and mint the stablecoin against it, typically at ratios above 150%. If collateral value falls, positions are liquidated to maintain the peg. The stablecoin's supply is governed by collateral types and risk parameters.
Why It Matters
Crypto-backed stablecoins are permissionless and transparent, with no reliance on banks or central reserves. They demonstrate that stable money can be collateralized entirely on-chain. Their capital inefficiency, however, makes them more expensive than fiat-backed alternatives.
Related Concepts
Crypto-Backed Stablecoins build on Collateral, Collateralized Debt Positions, and Liquidation. DAI is the leading example, and they connect to Lending and DeFi.