Crypto-backed stablecoin

A crypto-backed stablecoin is a stablecoin that uses cryptocurrency as collateral to support its target price. Instead of being backed mostly by cash or short-term reserves held by an issuer, the stablecoin is supported by crypto assets locked in a smart contract or protocol system. Because crypto prices can move quickly, crypto-backed stablecoins are often overcollateralized, meaning users are required to deposit more value than the stablecoins they create or borrow. The system holds the right to liquidate collateral if the value dips below required levels.

For example, if a user deposits $2,000 worth of ETH into a DeFi protocol and generates $1,000 worth of a dollar-pegged stablecoin. The ETH acts as collateral which backs the stablecoin position.