What is a Collateralization / Over-collateralization?
Quick Definition
Collateralization refers to the ratio between the value of assets held in reserve and the value of tokens issued. Over-collateralization means holding more in reserves than the value of tokens issued.
Full Definition
In a fully collateralized stablecoin, the ratio is 1:1. For every token in circulation, the issuer holds an equivalent value in reserves. Over-collateralization (e.g., 1.5:1 or 2:1) means the issuer holds more in reserves than the face value of the tokens issued, creating a buffer against potential losses or price drops in the collateral.
When over-collateralization is needed
Over-collateralization is most common in crypto-backed stablecoins, where the volatility of the collateral makes a 1:1 ratio insufficient. A sudden drop in the value of the collateral could otherwise leave the system under-collateralized, meaning there isn't enough backing to cover all tokens. Over-collateralization acts as a shock absorber against this risk.
For stablecoins backed by stable assets such as cash or government securities, 1:1 collateralization is typically sufficient because the value of the backing doesn't fluctuate significantly.
How Steady is collateralized
Steady is fully collateralized on a 1:1 basis. Because our underlying reserve assets, primarily short-term US Treasury Bills, are themselves stable and low-risk, over-collateralization isn't required to maintain our intended value. The full composition of the collateral is published and regularly updated on the Transparency Portal.
Related Terms
Backing
ReadBacking refers to the assets or mechanisms that support a stablecoin's value and help it maintain its intended reference value.
Reserve-backed Stablecoin
ReadA reserve-backed stablecoin is a stablecoin backed by real assets held in reserve, where each token in circulation is supported by an equivalent value of underlying assets.
Reserves
ReadReserves are the total pool of assets held by a stablecoin issuer to back the tokens in circulation.
Other Glossary Items
Learn about common and essential terms related to Steady and other stablecoin protocols.
Algorithmic Stablecoin
ReadAn algorithmic stablecoin attempts to maintain its value through automated rules that adjust token supply based on market demand, rather than holding equivalent reserve assets.
AML
ReadAML (Anti-Money Laundering) refers to the laws, regulations, and procedures designed to prevent the use of financial systems for laundering the proceeds of crime.
APY
ReadAPY, or Annual Percentage Yield, is the standardized rate of return an asset generates over a year, including the effect of compounding.
Arbitrum
ReadArbitrum is a Layer 2 blockchain network built on top of Ethereum, designed to offer faster and cheaper transactions while inheriting Ethereum's security and infrastructure.
Asset Backing
ReadAsset backing refers to the real-world or on-chain assets held by the issuer to support the value of every token in circulation.
Asset Locking
ReadAsset locking refers to restricting access to funds for a defined period or condition, during which they cannot be transferred or used.
Asset Segregation
ReadAsset segregation is the practice of keeping client or backing assets separate from the issuer's operational funds, protecting them from the issuer's other obligations.
Audit
ReadAn audit is an independent examination of a protocol's code, reserves, or operations by qualified third parties to verify accuracy and compliance with stated claims.
Blockchain Network
ReadA blockchain network is the system of connected participants and infrastructure that validates, records, and maintains data on a specific blockchain.
Blockchain
ReadA blockchain is a distributed digital ledger that records transactions across a network of computers in a secure, transparent, and tamper-resistant way.
Bridge
ReadA bridge is a mechanism that enables the transfer of assets or data between different blockchain networks.
Clarity Act
ReadThe Clarity Act is a proposed US legislative framework intended to clarify the regulatory treatment of digital assets, defining when they should be treated as securities versus commodities.
Composability
ReadComposability refers to the ability of different protocols, contracts, and tokens on a blockchain to interact and combine with each other seamlessly.
Counterparty Exposure
ReadCounterparty exposure refers to the risk that another party, such as a bank, custodian, broker, or service provider fails to fulfill its obligations, potentially affecting the assets or funds it holds.
Custodial vs. Non-Custodial
ReadCustodial means a third party holds the private keys to your assets on your behalf. Non-custodial means you hold your own keys and control your own assets directly.
LearnMoreAboutSteady
Transparency Portal
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FAQs
Discover the basics about Steady in our frequently asked questions.
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