What's that Fractional Stablecoins?

Fractional stablecoins are present as a new form of innovation in the world of cryptocurrency. What are fractional stablecoins? Check out the complete answer in this article!

Understanding Fractional Stablecoins

Fractional stablecoins represent a new form of stablecoin and cryptocurrency, combining asset-based collateralization and algorithmic stabilization. Various variations and variants of the fractional stablecoin model exist, such as some liquidity-backed or some allowing withdrawals, but the idea remains the same: the protocol mints more stablecoins than they can all be redeemed for.

Stable Base

Stablecoins, in essence, are digital assets tied to a blockchain, designed to maintain a price link, often set at $1. To maintain their usefulness and credibility as a payment method, stablecoins must have backing in the form of fiat cash, cryptocurrency, or on-chain tokens that can be exchanged or redeemed. This support is referred to as a guarantee.

Fractional Stability

A fractional stablecoin stands out by embracing a dual support system—collateralization and algorithmic customization. With a collateralization ratio of less than or equal to 100%, these stablecoins can be backed by a fraction of dollars or cryptocurrencies that is smaller than the total declared value.

This approach significantly improves capital efficiency by reducing the amount of idle collateral.

Dinamika Fractional Stablecoin

Fractional stablecoins essentially circulate more tokens than there is liquidity or collateral available, using algorithmic mechanisms to prevent bank collapses through economic incentives and game theory. If the market price goes above $1, the algorithmic system generates additional stablecoins until the price returns to $1. In contrast, in an over-collateralization scenario, the process reverses, resulting in the burning of available stablecoins or tokens.

Overcoming Challenges

While fully algorithmic stablecoins face startup challenges, slow growth, and periods of extreme volatility, fractional stablecoins leverage algorithms to dynamically adjust collateral.

This ensures that the stablecoin maintains its link by generating or burning available stablecoins or tokens. The result is a more robust and adaptive stablecoin model.

Conclusion: Navigating Stability

Fractional stablecoins are emerging as a dynamic solution, harnessing the power of collateralization and algorithmic customization. By circulating a larger supply of tokens than their collateral, they find a balance between stability and efficiency. As the crypto landscape evolves, fractional stablecoins are at the forefront, offering a robust and adaptive approach in the pursuit of stability in the digital realm.

Also read:
What are Stablecoins and How Are They Different from Fiat?
What are Algorithmic Stablecoins?
What is VNST Stablecoin? Features and Advantages

DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.