Crypto-backed stablecoin

Its core piece is the vault or collateralized debt position (CDP). The user locks collateral such as ETH or wBTC and mints the stablecoin against it, within a collateralization ratio that usually runs from 130 to 175 percent; at a 150 percent ratio it would take 150 dollars of ETH to mint 100 units of stablecoin. If the vault falls below the liquidation threshold, the collateral is auctioned automatically to protect system solvency. The user also pays a stability fee, the interest on the minted debt, which acts as the protocol's monetary policy lever. The peg holds through arbitrage and parameter adjustment via governance.

It is the decentralized, transparent model, with collateral and rules verifiable on-chain without depending on a centralized issuer custodying fiat. The cost is the capital inefficiency of over-collateralization and the risk of liquidations in sharp drops. In August 2024, MakerDAO rebranded as the Sky protocol and DAI began migrating to USDS; the system has incorporated real-world assets, chiefly US Treasuries, which stabilizes yield and introduces dependence on off-chain custodians.

DAI and USDS, from MakerDAO and Sky; LUSD, from Liquity, with ETH-only collateral and a 110 percent minimum ratio; crvUSD, from Curve, with soft liquidation; and GHO, from Aave. The March 2023 episode showed that their depeg can spread from the collateral, since part of DAI's backing was USDC, a reminder of the importance of diversifying and monitoring collateral quality.