Cryptocurrency supported stablecoins operate in a similar manner, but mostly use over collateralized lending systems due to their decentralized/KYC free nature. Typically, users deposit collateral (such as BTC worth $1000) into a protocol that can mint up to $800 worth of stablecoins, reflecting an 80% loan to value ratio (LTV). To prevent the devaluation of collateral from causing system bankruptcy, the agreement enforces a liquidation threshold. If the collateral value is lower than the specified LTV ratio, the system automatically clears the user’s BTC to cover outstanding debts, thereby preventing the accumulation of bad debts.
BINANCE Rebate invitation code:F2222
HTX Rebate invitation code:888ee
GATE Rebate invitation code:FFFFTTTT
The Maker/Sky protocol has issued the largest decentralized cryptocurrency in the space, supporting stablecoins (DAI and USDS), which has been the case since the launch of the single collateral DAI in 2017. The user casts the DAI by depositing the accepted collateral (such as ETH, wBTC, stETH, rETH, USDC, GUSD and other crypto assets, as well as the Tokenized real assets including US treasury bond bonds, real estate supported Tokens and loans) into Vaults (the original CDPs). Each type of collateral must meet a minimum collateral ratio (e.g. 150% for ETH), and if the vault value falls below this threshold, it will face liquidation to maintain system solvency. The process is as follows:
The user deposits 1 million BTC worth $100000 into Maker Vault as collateral. The wBTC Vault type requires a collateral ratio of 150% (66.67% LTV).
Users can cast up to 66666 DAI ($100000 * 66.67%).
If the user casts 50000 DAI with a buffer above the minimum ratio, Vault will hold 1 wBTC as collateral, with a collateral ratio of 200% or 50% LTV for the 50000 DAI debt.
If the value of wBTC falls below $75000 and the Vault collateral ratio is below 150%, Vault will become undercollateralized.
At this point, Vault will face liquidation: some wBTC will be auctioned/sold to cover DAI debt, plus liquidation fines.
If the user wishes to unlock the collateral at any time, they need to repay 50000 DAI (plus accumulated stability fees), and then withdraw wBTC.