Decentralization Ratio

Understanding the Decentralization Ratio

The Decentralization Ratio (DR) is a metric that measures the proportion of decentralized collateral value over the total stablecoin supply.

It assesses an asset‘s risk by evaluating the extent to which its value comes from decentralized sources. Unlike considering only internal system contracts, the DR considers all underlying collateral components that a protocol has claims on.

Quantifying Off-chain Risks

The DR is particularly useful in calculating the excess off-chain risk of stablecoins.

Collateral with high off-chain risks, such as fiat coins, securities, and custodial assets like gold or oil, are assigned a 0% decentralization rating.

Off-chain risks include government interference, asset freezing, or forced KYC (Know Your Customer) requirements.