How Does a Decentralized Stablecoin Maintain Its Dollar Peg?
Decentralized stablecoins maintain their peg through a combination of economic incentives and collateral management enforced by smart contracts. Mechanisms include over-collateralization, stability fees (interest rates), and arbitrage opportunities.
Arbitrageurs are incentivized to buy the stablecoin if it falls below $1 and sell if it rises above $1, restoring the balance.
Glossar
Stability Fees
Debt Servicing Cost ⎊ This is the periodic fee charged to borrowers based on the outstanding principal of their loan within a decentralized stablecoin system, designed to incentivize timely repayment and cover the protocol's operational and risk management costs.
Decentralized Stablecoin
Architecture ⎊ A decentralized stablecoin leverages blockchain technology, typically employing smart contracts on platforms like Ethereum or Solana, to maintain a peg to a fiat currency or other asset.
Collateral Management
RiskFunction ⎊ Collateral Management encompasses the systematic oversight, valuation, and maintenance of assets pledged to secure obligations, particularly crucial in leveraged derivatives trading and decentralized finance lending.
Stablecoin Peg
Target ⎊ Stablecoin Peg is the target exchange rate, typically one-to-one with a fiat currency like the US Dollar, that a stablecoin is engineered to maintain through automated or collateral-backed mechanisms.