Collateralization

Collateralization covers two families. The first backs an issued asset: stablecoins and RWA in circulation are covered by reserves or assets worth at least what is issued. The second secures a debt: the borrower deposits collateral to borrow against it, as in DeFi loans and CDPs. The central parameter is the collateralization ratio, the value of the collateral divided by the value of what is issued or borrowed. It can be 1:1 in fiat-backed stablecoins, or over-collateralized above 100% when the collateral is volatile, such as crypto backing a decentralized stablecoin.

It explains how a stablecoin holds its peg and how an RWA is worth what it claims. The type and ratio of collateral determine resilience against runs and exposure to the backing asset's risk. As best practices, systems build in automatic liquidation if the ratio falls below a threshold, and proof-of-reserve or attestations to demonstrate the backing. Under MiCA, reserve and segregation rules are the regulated version of collateralization for e-money tokens.

Examples: at the full-reserve, fiat-backed end are Circle's USDC and Paxos's USDP and PAXG, backed by custodied cash and Treasury bills. At the crypto over-collateralized end is DAI from MakerDAO or Sky, minted against crypto collateral, and increasingly RWA, above 100%. It is the mechanism that connects a token to its underlying asset and that sizes the issuer's counterparty risk.