Clear DefinitionsCollateralized Token
1 min read
Pronunciation
[kuh-lat-er-uhl-ey-tid to-ken]
Analogy
A collateralized token is like a warehouse receipt for gold—you can redeem the token for the underlying asset.
Definition
A token backed by assets—fiat, crypto, or commodities—held in reserve to maintain value stability or guarantee redemption.
Key Points Intro
Collateralization secures tokens through:
Key Points
Reserve backing: Assets held in smart contracts or custodial accounts.
Overcollateralization: Reserve value exceeds token supply for safety.
Redemption: Token holders can exchange tokens for collateral.
Transparency: Regular audits or on‑chain proofs of reserves.
Example
DAI is crypto‑collateralized: users lock ETH in MakerDAO vaults to mint DAI, maintaining >150% collateral ratio to ensure solvency.
Technical Deep Dive
Collateral contracts lock assets and issue tokens up to a collateralization ratio. Liquidation modules trigger auctions when collateral value falls below threshold. Oracles feed asset prices to compute collateral ratios. Smart contracts enforce mint, burn, and liquidation logic.
Security Warning
Oracle failures or sharp price drops can lead to undercollateralization and bad debt; ensure robust liquidation incentives.
Caveat
Requires robust risk parameters and liquidation mechanisms to remain solvent under volatility.
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