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  "id": "crypto-backed-stablecoins",
  "canonical": "https://degreesofsatoshi.com/encyclopedia/crypto-backed-stablecoins/",
  "collection": "stablecoins",
  "title": "Crypto-backed stablecoins: debt, collateral and liquidation",
  "description": "How collateralized stablecoins are created, why collateral buffers matter, and how liquidation and oracle failures can affect the system.",
  "aliases": [
    "collateralized stablecoins",
    "crypto-collateralized stablecoins"
  ],
  "dates": {
    "published": "2026-10-02",
    "modified": "2026-10-02",
    "verified": "2026-10-02T15:09:00.630Z",
    "dataAsOf": "2026-10-02"
  },
  "authorship": {
    "publisher": "Degrees of Satoshi editorial project",
    "process": "AI-assisted research and drafting with a separate automated source-verification pass; no external expert or named human review is implied."
  },
  "quickAnswer": {
    "text": "A crypto-backed stablecoin can be created by borrowing against crypto collateral locked in a protocol. A collateral buffer and liquidation process aim to keep debt covered as prices move. The mechanism depends on accurate prices, functioning contracts and buyers for collateral; overcollateralization is not a guarantee against loss.",
    "claimId": "crypto-backed-stablecoins-quick-answer",
    "sourceIds": [
      "sky-vat",
      "sky-liquidation"
    ]
  },
  "keyFacts": [
    {
      "label": "Debt",
      "value": "Minting against a vault creates a debt obligation for its borrower.",
      "sourceIds": [
        "sky-vat"
      ],
      "id": "debt",
      "claimId": "crypto-backed-stablecoins-fact-debt"
    },
    {
      "label": "Buffer",
      "value": "Collateral value relative to debt can fall when collateral prices fall.",
      "sourceIds": [
        "sky-vat",
        "sky-liquidation"
      ],
      "id": "buffer",
      "claimId": "crypto-backed-stablecoins-fact-buffer"
    },
    {
      "label": "Dependencies",
      "value": "Price feeds, auctions and governance affect the mechanism.",
      "sourceIds": [
        "sky-vat",
        "sky-liquidation"
      ],
      "id": "dependencies",
      "claimId": "crypto-backed-stablecoins-fact-dependencies"
    }
  ],
  "prerequisites": [
    "what-is-a-stablecoin"
  ],
  "sections": [
    {
      "id": "creating-debt",
      "heading": "The borrower and token holder have different roles",
      "sourceIds": [
        "sky-vat"
      ],
      "paragraphs": [
        "A vault lets a borrower lock an accepted asset and create a stablecoin-denominated debt. The borrower can spend the newly issued token, but still owes the debt and applicable fees. Someone who later buys that token does not inherit the borrower’s personal vault obligation.",
        "To withdraw collateral safely, the borrower must satisfy the protocol’s debt and collateral rules. The token therefore circulates separately from the position that helped create it. A blockchain balance alone will not explain which collateral pools or borrowers support the wider system."
      ]
    },
    {
      "id": "illustrative-ratio",
      "heading": "Work through a collateral ratio",
      "sourceIds": [
        "sky-vat",
        "sky-liquidation"
      ],
      "paragraphs": [
        "In an illustrative vault, $200 of collateral supports 100 units of dollar debt, producing a 200% collateral ratio. If that collateral falls to $150 while debt remains 100, the ratio falls to 150%. Fees that increase debt can reduce the ratio even when the collateral price is unchanged.",
        "These numbers are a teaching example, not live protocol parameters. A real vault has a specific collateral type, debt ceiling, minimum position size, liquidation threshold and fee schedule. A protocol can also include stablecoin or off-chain exposures, so a historical “crypto-backed” description may not capture its current portfolio."
      ]
    },
    {
      "id": "liquidation",
      "heading": "The buffer gives liquidation room to work",
      "sourceIds": [
        "sky-liquidation",
        "sky-vat"
      ],
      "paragraphs": [
        "Liquidation sells collateral to cover a position whose debt has become too large relative to its backing. The Sky documentation describes auction machinery with configurable prices and limits. Liquidators need a reason and a route to buy; collateral cannot repay debt simply because a formula says it has value.",
        "An abrupt price gap, unreliable oracle, congested chain or thin market can undermine the process. The difference between a theoretical collateral value and cash actually realizable in a stressed sale matters. Governance and adapter permissions also remain part of the trust model, even when the accounting is visible on-chain."
      ]
    }
  ],
  "faq": [
    {
      "question": "Does every collateralized stablecoin hold only crypto?",
      "answer": "No. Inspect the actual asset categories. Sky’s June 2026 description includes stablecoins, lending and traditional-asset exposures as well as on-chain collateral.",
      "sourceIds": [
        "sky-collateral"
      ]
    },
    {
      "question": "Can excess collateral prevent every loss?",
      "answer": "No. Liquidation depends on price data, software and an executable market for the collateral. A buffer can be exhausted.",
      "sourceIds": [
        "sky-liquidation",
        "sky-vat"
      ]
    }
  ],
  "claims": [
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      "id": "crypto-backed-stablecoins-quick-answer",
      "articleSlug": "crypto-backed-stablecoins",
      "statement": "A crypto-backed stablecoin can be created by borrowing against crypto collateral locked in a protocol. A collateral buffer and liquidation process aim to keep debt covered as prices move. The mechanism depends on accurate prices, functioning contracts and buyers for collateral; overcollateralization is not a guarantee against loss.",
      "sourceIds": [
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      "sourceLocators": [
        {
          "sourceId": "source-69368320969c12c1",
          "locator": "Vault Management; Failure Modes; Accounting"
        },
        {
          "sourceId": "source-e50fa98c976bfb4a",
          "locator": "Liquidation 2.0 module; Auctions"
        }
      ],
      "scope": {
        "collection": "stablecoins",
        "dataAsOf": "2026-10-02",
        "blockHeight": null
      },
      "qualification": "",
      "evidenceStatus": "documented",
      "verification": {
        "status": "verified",
        "method": "independent automated source review",
        "checkedAt": "2026-10-02T15:09:00.630Z",
        "reviewer": "automated independent verification",
        "notes": [
          "Sky Vat vault management and liquidation documentation support debt issuance, collateral thresholds, oracle/governance dependencies and sale mechanics.",
          "Verified 200/100=200% and 150/100=150%; the ratios are illustrative, with actual parameters explicitly excluded."
        ]
      }
    },
    {
      "id": "crypto-backed-stablecoins-fact-debt",
      "articleSlug": "crypto-backed-stablecoins",
      "statement": "Debt: Minting against a vault creates a debt obligation for its borrower.",
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      "sourceLocators": [
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      ],
      "scope": {
        "collection": "stablecoins",
        "dataAsOf": "2026-10-02",
        "blockHeight": null
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      "qualification": "",
      "evidenceStatus": "documented",
      "verification": {
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        "checkedAt": "2026-10-02T15:09:00.630Z",
        "reviewer": "automated independent verification",
        "notes": [
          "Sky Vat vault management and liquidation documentation support debt issuance, collateral thresholds, oracle/governance dependencies and sale mechanics.",
          "Verified 200/100=200% and 150/100=150%; the ratios are illustrative, with actual parameters explicitly excluded."
        ]
      }
    },
    {
      "id": "crypto-backed-stablecoins-fact-buffer",
      "articleSlug": "crypto-backed-stablecoins",
      "statement": "Buffer: Collateral value relative to debt can fall when collateral prices fall.",
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          "locator": "Liquidation 2.0 module; Auctions"
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      "scope": {
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        "blockHeight": null
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      "evidenceStatus": "documented",
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        "notes": [
          "Sky Vat vault management and liquidation documentation support debt issuance, collateral thresholds, oracle/governance dependencies and sale mechanics.",
          "Verified 200/100=200% and 150/100=150%; the ratios are illustrative, with actual parameters explicitly excluded."
        ]
      }
    },
    {
      "id": "crypto-backed-stablecoins-fact-dependencies",
      "articleSlug": "crypto-backed-stablecoins",
      "statement": "Dependencies: Price feeds, auctions and governance affect the mechanism.",
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        "notes": [
          "Sky Vat vault management and liquidation documentation support debt issuance, collateral thresholds, oracle/governance dependencies and sale mechanics.",
          "Verified 200/100=200% and 150/100=150%; the ratios are illustrative, with actual parameters explicitly excluded."
        ]
      }
    }
  ],
  "sources": [
    {
      "id": "sky-vat",
      "label": "Vat: Core Accounting",
      "publisher": "Sky Protocol",
      "url": "https://developers.skyeco.com/protocol/core/vat/",
      "note": "Collateralized issuance, debt accounting, oracle and governance dependencies.",
      "checkedAt": "2026-10-02T14:38:38.888971+00:00",
      "locator": "Vault Management; Failure Modes; Accounting",
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    {
      "id": "sky-liquidation",
      "label": "Collateral Liquidation",
      "publisher": "Sky Protocol",
      "url": "https://developers.skyeco.com/protocol/vaults/collateral-liquidation/",
      "note": "Liquidation via collateral sales, parameters and failure modes.",
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      "locator": "Liquidation 2.0 module; Auctions",
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    {
      "id": "sky-collateral",
      "label": "What is USDS?",
      "publisher": "Sky.money / Skybase International",
      "url": "https://sky.money/blog/what-is-usds",
      "note": "Dated 2026-06-12 description of diversified collateral and separate savings product; marketing assertions not independently audited.",
      "checkedAt": "2026-10-02T14:38:42.654541+00:00",
      "locator": "How USDS holds its peg; Protocol Collateral; Does USDS generate yield?",
      "version": "Response SHA-256 3726cdd7e7b5e102192c9e0df4f87d2c7fc6dda8b0259152430012681ef85c1d",
      "recordId": "source-e789fc9fcc6cbef2",
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  "related": {
    "articles": [
      "dai-and-usds",
      "stablecoin-depegging",
      "algorithmic-stablecoins"
    ],
    "dossiers": [],
    "wallets": []
  },
  "revisionHistory": [
    {
      "date": "2026-10-02",
      "kind": "published",
      "summary": "First publication after primary-source research and independent automated verification."
    }
  ],
  "citation": "Degrees of Satoshi editorial project. “Crypto-backed stablecoins: debt, collateral and liquidation.” Published 2026-10-02; updated 2026-10-02. https://degreesofsatoshi.com/encyclopedia/crypto-backed-stablecoins/"
}