# Crypto-backed stablecoins: debt, collateral and liquidation 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. Evidence: [Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/); [Collateral Liquidation](https://developers.skyeco.com/protocol/vaults/collateral-liquidation/) Canonical: https://degreesofsatoshi.com/encyclopedia/crypto-backed-stablecoins/ Published: 2026-10-02 Substantively modified: 2026-10-02 Independently verified by an automated reviewer: 2026-10-02T15:09:00.630Z Data current through: 2026-10-02 AI-assisted research and drafting with a separate automated source-verification pass; no external expert or named human review is implied. ## Key facts - **Debt:** Minting against a vault creates a debt obligation for its borrower. ([Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/)) - **Buffer:** Collateral value relative to debt can fall when collateral prices fall. ([Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/); [Collateral Liquidation](https://developers.skyeco.com/protocol/vaults/collateral-liquidation/)) - **Dependencies:** Price feeds, auctions and governance affect the mechanism. ([Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/); [Collateral Liquidation](https://developers.skyeco.com/protocol/vaults/collateral-liquidation/)) ## The borrower and token holder have different roles 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. Evidence: [Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/) ## Work through a collateral ratio 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. Evidence: [Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/); [Collateral Liquidation](https://developers.skyeco.com/protocol/vaults/collateral-liquidation/) ## The buffer gives liquidation room to work 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. Evidence: [Collateral Liquidation](https://developers.skyeco.com/protocol/vaults/collateral-liquidation/); [Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/) ## Questions ### Does every collateralized stablecoin hold only crypto? No. Inspect the actual asset categories. Sky’s June 2026 description includes stablecoins, lending and traditional-asset exposures as well as on-chain collateral. Evidence: [What is USDS?](https://sky.money/blog/what-is-usds) ### Can excess collateral prevent every loss? No. Liquidation depends on price data, software and an executable market for the collateral. A buffer can be exhausted. Evidence: [Collateral Liquidation](https://developers.skyeco.com/protocol/vaults/collateral-liquidation/); [Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/) ## Claims and scope ### crypto-backed-stablecoins-quick-answer 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. Scope: {"collection":"stablecoins","dataAsOf":"2026-10-02","blockHeight":null} ### crypto-backed-stablecoins-fact-debt Debt: Minting against a vault creates a debt obligation for its borrower. Scope: {"collection":"stablecoins","dataAsOf":"2026-10-02","blockHeight":null} ### crypto-backed-stablecoins-fact-buffer Buffer: Collateral value relative to debt can fall when collateral prices fall. Scope: {"collection":"stablecoins","dataAsOf":"2026-10-02","blockHeight":null} ### crypto-backed-stablecoins-fact-dependencies Dependencies: Price feeds, auctions and governance affect the mechanism. Scope: {"collection":"stablecoins","dataAsOf":"2026-10-02","blockHeight":null} ## Sources - [Vat: Core Accounting](https://developers.skyeco.com/protocol/core/vat/) — Sky Protocol. Collateralized issuance, debt accounting, oracle and governance dependencies. Locator: Vault Management; Failure Modes; Accounting. Retrieved: 2026-10-02T14:38:38.888971+00:00. - [Collateral Liquidation](https://developers.skyeco.com/protocol/vaults/collateral-liquidation/) — Sky Protocol. Liquidation via collateral sales, parameters and failure modes. Locator: Liquidation 2.0 module; Auctions. Retrieved: 2026-10-02T14:38:38.896399+00:00. - [What is USDS?](https://sky.money/blog/what-is-usds) — Sky.money / Skybase International. Dated 2026-06-12 description of diversified collateral and separate savings product; marketing assertions not independently audited. Locator: How USDS holds its peg; Protocol Collateral; Does USDS generate yield?. Retrieved: 2026-10-02T14:38:42.654541+00:00. ## Revision history - 2026-10-02: First publication after primary-source research and independent automated verification. ## Cite this entry 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/