ELI5 DeFi
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Crypto Backed

Decentralize it

These are similar to fiat backed tokens, but there's a bit more work to have the token target a dollar. These protocols are over-collateralized with a healthy safety factor for protection against price swings. Protocols can create economic incentives to increase or decrease supply. If the collateral (times a safety factor) becomes worth less than the stablecoin, part of the collateral is sold to make up for the debt.
This explanation is intentionally high-level. Read this article if you want to dig deeper.

Pros

  • Decentralized
  • No trusted custodian
  • Emergency Shutdown can guarantee a $1/token buyout

Cons

  • Not as straightforward to understand
  • Approximates $1, not tightly coupled

Example

  • DAI (0x6b175474e89094c44da98b954eedeac495271d0f)