Stability Mechanisms

Every stablecoin answers the same question differently: "Why is this token worth $1?" The answer determines everything — capital efficiency, decentralization, censorship resistance, and risk profile. Below we simulate the core mechanism of each approach.

🏦 Collateral-Backed Mint/Burn Simulator

For over-collateralized stablecoins like DAI: deposit ETH → mint stablecoin (up to collateral ratio limit). If collateral value drops below the liquidation ratio, the position gets liquidated.

ETH Deposited 10 ETH Price ($) 2000 Min Collateral Ratio (%) 150 DAI Minted 8000

Collateral Value

$20,000

Max Mintable

13,333 DAI

Current Ratio

250%

Status

✓ Safe

Liq Price

$1,200

⚙️ Algorithmic Peg: Mint & Burn Arbitrage

Terra/UST used a burn mechanism: burn $1 of LUNA → mint 1 UST. If UST < $1, arbitrageurs buy UST and burn for $1 of LUNA (profit). This works — until confidence breaks and LUNA hyperinflates.

UST Market Price ($) 0.98 LUNA Market Cap ($B) 20 UST Supply ($B) 18

Arb Profit (per $1)

$0.02

Backing Ratio

111%

Death Spiral Risk

Low

💡 Key Tradeoffs

Capital Efficiency

Fiat-backed: 100% (1:1)
Crypto-backed: 33-67% (150-300% ratio)
Algorithmic: 100%+ (but fragile)
Delta-neutral: ~100% (leveraged backing)

Failure Modes

Fiat: bank failure, freeze, regulatory
Crypto: mass liquidations, oracle failure
Algo: death spiral, reflexivity trap
Delta-neutral: funding rate inversion