How Do Over-Collateralized Stablecoins like MakerDAO’s DAI Attempt to Mitigate Psychological “Bank Run” Risks?
Over-collateralized stablecoins like DAI mitigate bank run risk by backing each dollar of stablecoin with more than a dollar's worth of volatile assets like Ethereum. This collateral is locked in transparent smart contracts.
This system is designed to withstand price shocks because even if the collateral's value drops, there is a buffer. The transparency of the on-chain collateral allows users to verify the backing at any time, fostering trust and reducing the purely psychological panic that can trigger a run on an uncollateralized or under-collateralized asset.
Glossar
MakerDAO
Decentralized Stablecoin Issuer ⎊ This refers to the specific governance system responsible for managing the Dai stablecoin, primarily through the collateralization of various crypto assets in risk-assessed vaults to maintain the one-to-one peg with the reference currency.
Dai
Collateralization ⎊ Dai functions as a decentralized stablecoin, uniquely maintained through a system of collateralized debt positions (CDPs) on the Ethereum blockchain.
Bank Run Risk
Contagion ⎊ Bank Run Risk within cryptocurrency, options, and derivatives manifests as a rapid withdrawal of funds driven by loss of confidence, amplified by interconnectedness and algorithmic trading.