Understanding Fractional Stablecoins
Fractional stablecoins represent a novel category of stablecoins and cryptocurrencies, combining partial collateral backing with algorithmic stabilization.
The fractional stablecoin model encompasses various iterations, such as liquidity-backed or partially redeemable stablecoins, but they all share a common principle.
These protocols mint more stablecoins than the total value they can be redeemed against.
Blockchain-Based Digital Assets
Stablecoins are digital assets built on blockchain, designed to maintain a fixed price peg, often set at $1.
To ensure their credibility and usefulness as a payment method, stablecoins require backing in fiat cash, cryptocurrencies, or on-chain tokens, which can be redeemed or swapped for the stablecoin.
This backing is referred to as collateral.
Fractional Stablecoins
Fractional stablecoins embrace a dual approach to backing: collateralization and algorithmic adjustments.
They maintain a collateralization ratio of less than or equal to 100%, meaning the stablecoin can be backed by a fraction of the total value, requiring fewer real dollars or cryptocurrencies to remain idle as collateral.
In other words, fractional stablecoins have a larger circulating token supply than the liquidity or collateral available.
Typically, these stablecoins employ algorithmic mechanisms that incentivize economic behavior and game theory to prevent scenarios akin to bank runs.