Stablecoins & the Crypto Monetary System
The backing moves too. So you lock more than you mint.
Here there are no dollars sitting at a bank. There is crypto collateral locked in a smart contract — more decentralised, more transparent, and trickier, because the security itself swings. The system defends itself with a buffer and a set of rules.
The problem
Watch the floor come up to meet you.
One unit of crypto collateral, worth 150 $ when you lock it, and 100 stablecoins minted against it. Press once for each fall in the collateral price, and watch two rows in particular: the ratio, and the price the contract is actually reading.
One position, one price feed
ILLUSTRATIVE MODELCalm. The collateral covers the coins one and a half times over, and the market and the feed agree on the price. Nothing here is a real asset or a real protocol — this is a model of the mechanism. Press Let the collateral price fall.
That is the whole reason for the buffer. Because crypto collateral swings, 1:1 is not backing — at 150% you post crypto worth 150 $ to mint 100 stablecoins, and the extra 50 $ is there to absorb a fall in the price. Liquidation is what enforces it: when the margin drops below the limit, the contract closes the position or sells part of the collateral automatically, so there are never more stablecoins in circulation than there is collateral behind them. It protects the coverage, not you — you can lose part or all of what you posted. The worked example for this design is DAI in the Maker system, where positions are often collateralised at 150 % or more.
Collateral you can inspect on-chain is worth nothing if the number the contract acts on is wrong. A price oracle is the piece that carries the outside price onto the chain, and liquidations trigger on that figure — not on what the market was really doing. Stale, faulty or manipulated, and a perfectly healthy position gets closed on a price that never existed. The rules themselves are code as well, so a fault in the contract is its own risk. A fiat-backed design asks you to trust an issuer; this one asks you to trust a price feed and a smart contract. That is a different set of risks, not a smaller one.
The definition
Three things this design does differently.
Tap each card for what is really going on behind it.
Hands on
You want to mint 100 stablecoins. How much do you lock?
Drag the value of the crypto collateral you post and see where the system stays stable. The minted side never moves — only the buffer above it does.
Under-collateralised
Because the collateral itself swings, a buffer above 100% is needed. The larger the over-collateralisation, the more of a price fall the position survives — and the price of that decentralisation is capital tied up doing nothing else.
The bridge
The life of one position, start to finish.
Stability here does not come from an issuer. It comes from rules, running in order.
Collateral sits on-chain where anyone can check it, oracles deliver the prices liquidations trigger on, and arbitrage keeps the peg near its target. Stability through code instead of an issuer — bought with collateral volatility, liquidation risk, and oracle plus smart-contract risk. It gets more experimental still when the hard backing goes altogether: next up, algorithmic stablecoins.
Check yourself
Five questions.
Answers come straight from this lesson. Submitting completes it.