Collateralization

And Its Impact on a Hybrid Stablecoin

Collateralization plays a crucial role in the stability and resilience of a hybrid stablecoin such as NUSD. At its core, collateralization refers to the backing of a stablecoin by a reserve of assets. This reserve is maintained to ensure that each unit of the stablecoin has a corresponding value in the reserve, which helps maintain the stablecoin's peg to its target price.

In the context of NUSD, our collateralization strategy is not focused on issuing collateralized loans. Rather, we leverage a dynamic system of taxes and rebates that shift based on the Time-Weighted Average Price (TWAP) for a given epoch, and whether we're undercollateralized (below 110%) or overcollateralized (above 150%).

The collateralization ratio can be calculated using the following formula:

Collateralization Ratio = (Value of Collateral / Total Value of NUSD) * 100%

The higher our collateralization ratio, the more stable the price of NUSD becomes. This is because a higher collateralization ratio means that we have more assets in reserve to back each unit of NUSD, providing a stronger guarantee of its value.

When the system becomes overcollateralized, it signifies that we have more than sufficient reserves to back the value of NUSD. This robust financial position allows us to explore additional opportunities such as lending and providing liquidity loans for our Decentralized Exchange (DEX). For more information on these aspects, please refer to the relevant sections in our documentation.

In summary, maintaining an optimal collateralization ratio is key to our approach in ensuring the stability of NUSD and providing a reliable, trustworthy stablecoin for our users.