Crypto-Collateralized Stablecoin
A stablecoin created by locking volatile digital assets in a contract at a value greater than the tokens issued against them.
A user deposits collateral, mints stablecoins against it up to a limit, and repays them with a fee to unlock the deposit; the debt and the collateral are both visible on chain. Because the collateral is volatile, the system requires a substantial cushion and liquidates positions automatically when the cushion is breached, selling collateral through auctions or to liquidators. The advantage is verifiability, since anyone can check the backing without trusting a report, and the weakness is correlation, because a rapid market-wide fall stresses every position at once and can leave the system undercollateralized if auctions fail to clear. Several such systems now hold fiat-backed stablecoins and tokenized government debt among their collateral, which improves stability while reintroducing off-chain dependencies.
In practice
MakerDAO's DAI is the long-standing example, issued against collateral locked in on-chain vaults and defended by automatic liquidation of positions that fall below their required ratio.
The common misunderstanding
On-chain collateral is verifiable but not risk-free; a fast, correlated decline can liquidate positions at a loss and leave the system short of backing.