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Dai is a crypto-collateralized stablecoin.Credit: Dai mark via Cryptocurrency IconsOriginal sourceLicenseAll image credits

Stablecoins can share the same price target while relying on very different mechanisms. The backing assets, redemption rules, smart contracts, and responsible organizations determine the risks.

Reserves and onchain collateral

Fiat-backed tokens depend on an issuer and offchain reserve assets. Crypto-backed designs normally lock onchain collateral and use overcollateralization or liquidation rules to absorb price moves.

Collateral quality matters as much as quantity

Liquidity, custody, credit exposure, price volatility, and legal claims all affect how useful backing assets are during stressed redemptions.

Algorithmic designs depend on incentives

Some systems try to influence supply through formulas, paired assets, or market incentives. If confidence or liquidity disappears, the mechanism may be unable to restore the target price.

Risks are specific to the stability mechanism

An issuer-backed token carries issuer and banking risk; a crypto-backed token adds oracle and liquidation risk; an algorithmic design depends heavily on market incentives.

Sources

  1. Ethereum.org — Stablecoins explained