Crypto/Multi-Asset-collateralized

This model aims to ensure stability by collateralizing with cryptocurrency or multiple assets. How do you employ volatile cryptocurrency or multiple assets to back a stablecoin? This is usually through over-collateralization such that the stablecoins can absorb the volatility of the underlying cryptocurrency e.g. 1:2 or more ratio. If the price of the underlying instrument crashes beyond what the system can absorb, then the stablecoin is automatically liquidated into the underlying instrument, which then leaves the user exposed to market fluctuations. Notable cryptocurrencies using this model are BitUSD backed by BitShares, and MakerDao’s Dai. Vitalik Buterin has also proposed a collateralized debt obligation that issues stablecoins against loans of different tranches of seniority.

Advantages

• More transparent as all transactions are on the blockchain, and the ratio of collateralization can easily be verified
• More decentralized
• Can liquidate quickly into underlying cryptocurrency

Disadvantages

• Most inefficient use of capital
• Susceptible to the volatility of the underlying cryptocurrency
• Can liquidate automatically into a crashing underlying cryptocurrency