A cryptocurrency or digital currency basket is used to ensure this type of Stablecoins. In this case, the use of central depositories such as banks is avoided. This system also helps to achieve price stability of tokens in a decentralized system.
In this system, a stablecoin is overly ensured with a pledge to absorb any price fluctuations of the reserve cryptocurrency.
For example, a $1 of stablecoin is reinforced by a $2 of pledge coin. This reserve is 200% in case the pledge coin significantly loses value.
- no need to rely on a third party that provides storage of collateral;
- a higher level of decentralization;
- blockchain transactions make it possible to regulate the offer of Stablecoins faster;
- higher liquidity than fiat stablecoins (one blockchain transaction is enough to pay off Stablecoins with the corresponding amount in the cryptocurrency);
- high level of transparency with no need for an external auditor (monitoring is available for everyone).
- the degree of the rate stability compared to fiat stablecoins is not so high;
- the probability of automatic repayment in the pledge cryptocurrency in case of a sharp fall of the stablecoin rate;
- dependence on the viability of another cryptocurrency (or a digital currency basket);
- more complicated system compared to fiat stablecoins.
Examples of Crypto-Collateralized Stablecoins: Dai (DAI), bitUSD (BITUSD)