How Does a Decentralized Stablecoin Maintain Its Price Peg without a Central Bank?
It uses automated mechanisms, typically smart contracts, to manage supply and demand. For collateralized stablecoins, users over-collateralize their positions with volatile crypto assets to mint the stablecoin.
If the collateral value drops, liquidation mechanisms are triggered to maintain the peg. Algorithmic stablecoins adjust supply by burning or minting tokens based on market price fluctuations.
Glossar
Volatile Crypto Assets
Volatility ⎊ Volatile crypto assets represent a class of digital assets characterized by significant price fluctuations over short periods, demanding sophisticated risk management strategies.
Liquidation Mechanisms
Trigger ⎊ Liquidation mechanisms are automated processes in decentralized finance protocols designed to manage collateral risk in lending and derivatives markets.
Algorithmic Stablecoins
Architecture ⎊ Algorithmic stablecoins represent a class of cryptocurrencies designed to maintain a stable value, typically pegged to a fiat currency like the US dollar, through algorithmic mechanisms rather than relying on collateralization by traditional assets.
Price Peg
Anchor ⎊ The price peg, within cryptocurrency derivatives and options markets, functions as a mechanism designed to constrain the price of an underlying asset or token within a predetermined range.