Backing a stable token with volatile assets
Crypto-collateralized stablecoins take a very different approach: instead of trusting a custodian with off-chain dollars, they lock volatile crypto assets, like a major layer-1 token, directly into a smart contract, and mint stablecoins against that locked value. The core design problem is obvious: the collateral itself can swing wildly in price, so if you locked exactly one dollar of crypto for every one dollar of stablecoin minted, a routine price dip would leave the debt undercollateralized almost immediately. The fix is over-collateralization, requiring users to lock collateral worth substantially more than the stablecoin they're allowed to mint, often 150% or more of the debt value, so there's a cushion that can absorb normal volatility before the position becomes a problem.
This shifts where the trust lives. There's no custodian and no off-chain reserve, the backing is verifiable on-chain at any moment. But it introduces new dependencies: the system needs a reliable price oracle to know what the locked collateral is currently worth, and it needs an automated mechanism to act when that value falls too close to the debt it's backing. The peg isn't held up by a promise from an institution, it's held up by the mathematical relationship between collateral value and debt, enforced entirely in code, and continuously monitored.