How Does the Collateralization Ratio Differ between Algorithmic and Fully Backed Stablecoins?
Fully backed stablecoins (like USDC) aim for a 1:1 ratio, meaning $1 of fiat or equivalent collateral for every stablecoin. Algorithmic stablecoins, by design, are either under-collateralized or not collateralized at all, relying purely on market mechanisms.
This lack of physical backing is the core vulnerability that makes them susceptible to death spirals when confidence fails.
Glossar
Crypto-Backed
Collateral ⎊ Crypto-backed arrangements represent a novel form of secured finance within decentralized ecosystems, utilizing digital assets as underlying collateral for derivative contracts or loan facilities.
Regulatory Implications
Consideration ⎊ Regulatory implications refer to the legal and compliance consequences arising from specific financial activities, products, or market structures.
Collateralization Ratio
MarginRequirement ⎊ The Collateralization Ratio quantifies the amount of posted margin relative to the notional value or exposure of a leveraged position, serving as the primary metric for assessing margin adequacy.