What Is the Difference between Over-Collateralized and Under-Collateralized Stablecoins?
Over-collateralized stablecoins hold more than $1 worth of assets for every stablecoin issued, providing a buffer against price volatility of the collateral. Under-collateralized (or fractional reserve) stablecoins hold less than $1, relying on user confidence and a mechanism to maintain the peg.
Purely algorithmic stablecoins are effectively zero-collateralized.
Glossar
Liquidation Penalty
Consequence ⎊ The liquidation penalty, inherent in cryptocurrency derivatives and options trading, represents the financial detriment incurred when a position is forcibly closed due to margin requirements falling below a predetermined threshold.
Capital Efficiency
Leverage ⎊ Capital efficiency, within cryptocurrency and derivatives, fundamentally represents the maximization of risk-adjusted returns relative to the capital at risk, demanding strategic asset allocation and precise risk parameterization.
Algorithmic Stablecoins
Architecture ⎊ Algorithmic stablecoins represent a class of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency, through the use of algorithms and smart contracts rather than relying on collateralized reserves.