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What is a crypto-backed stablecoin?
A crypto-backed stablecoin is a token meant to hold a steady value, often one dollar, that is created when someone locks cryptocurrency worth more than the stablecoins they mint in a smart contract. The extra collateral is a cushion against the collateral's price falling.
What it means for you
Minting one is a loan: if your collateral's value falls below the required ratio, the protocol can liquidate it, and you keep the stablecoins but lose the collateral. If you only hold the coin, its peg depends on the collateral's value and on liquidations working during a crash.
How it works
These stablecoins live entirely on a blockchain. A user deposits collateral, such as ether, and the contract lets them mint stablecoins only up to a fraction of its value, because the collateral can swing sharply against the dollar. The protocol values the collateral continuously; when it falls, the user has to add collateral or repay stablecoins to meet the minimum ratio, or the position is liquidated and the collateral sold, sometimes by auction. Fees and auction proceeds fund the system. Because anyone with a wallet can usually mint, the arbitrage that defends the peg is open to all.
An example
Say a protocol requires collateral worth 150% of what you mint. You lock ether worth $1,500 and mint 1,000 stablecoins. If the ether falls to $1,400, your ratio drops to 140%, below the minimum, and the protocol can sell your collateral to cover the 1,000 stablecoins.
Sources: Federal Reserve FEDS Notes: The stable in stablecoins, Federal Reserve FEDS Notes: Primary and Secondary Markets for Stablecoins · checked 4 October 2026
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