What Are Decentralized Stablecoins?
Decentralized stablecoins are tokens that mirror the price of an underlying asset without having to rely on a centralized entity, with all the rules being enforced by smart contracts and algorithms.
Unlike their centralized counterparts, which are backed by cash reserves managed by a single entity, decentralized stablecoins achieve price stability through automated algorithms or smart contracts on a blockchain. They are fully transparent and are non-custodial, meaning that there is no centralized entity controlling the reserves. Any collateral that backs a decentralized stablecoin is visible to users thanks to blockchain.
Decentralization enables a trustless and secure ecosystem that is independent of any external involvement or censorship. No single entity can tamper with the supply of the coin.
How Do Decentralized Stablecoins Work?
Decentralized stablecoins rely on algorithms and smart contracts to adjust the supply of the token in order to maintain a stable value. In a nutshell, if the price of the token increases, the system will create new tokens to meet demand, and when it drops below the peg, the system will burn the tokens to reach parity.
However, some decentralized stablecoins rely on some form of collateral – mainly involving crypto assets – while others don’t. For example, Ampleforth (AMPL) is a type of decentralized stablecoin that doesn’t use any form of collateral. It adjusts the token supply on a daily basis based on demand. Tokens like AMPL fall under the category of algorithmic stablecoins.
