Understanding Over-Collateralization (OC)
Over-collateralization (OC) refers to providing collateral that has a value exceeding the potential losses if a default occurs.
This strategy is primarily used to manage risk effectively. It involves pledging an asset as collateral for a loan where the asset’s value exceeds its value.
Algorithmic Controllers and Collateral Efficiency
Over-collateralized stablecoins are those that keep a substantial amount of cryptocurrency tokens in reserve to issue a fewer number of stablecoins, creating a cushion against price volatility.
However, as stablecoins gain popularity and acceptance, collateralizing them isn’t always efficient.
It means that collateral sitting idle could potentially be utilized more profitably elsewhere.
Recent innovations have seen the development of stablecoins with algorithmic controllers that can issue more coins when the price goes up and buy them off the market when the price drops.
This algorithmic supply manipulation to impact the price eliminates the need for collateral backing.