How Does the “Mint and Burn” Mechanism Work for Stablecoins?
It is used to maintain a stablecoin's peg, often to a fiat currency like the USD. When a user deposits collateral (e.g.
USD), new stablecoins are "minted" and issued to them, increasing supply. When a user redeems stablecoins for the collateral, the returned stablecoins are "burned," reducing the supply.
This process ensures the supply dynamically adjusts to meet demand while keeping the value close to the peg.
Glossar
Mint and Burn Process
Process ⎊ The mint and burn process, prevalent in cryptocurrency and increasingly utilized within options and derivatives markets, represents a mechanism for reducing the circulating supply of an asset.
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.
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.
Stablecoin Mint and Burn
Mint ⎊ The stablecoin mint and burn mechanism fundamentally involves the creation and subsequent destruction of tokens to maintain a desired peg, typically to a fiat currency or other asset.