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Fractional Stablecoins

Fractional Stablecoins are a type of cryptocurrency that combines collateral backing with algorithmic mechanisms to maintain their value, typically pegged to a stable asset like fiat currency. Unlike traditional stablecoins, which are entirely backed by collateral, fractional stablecoins have a collateralization ratio of less than or equal to 100%. This means they are partially backed by real assets (like fiat money or other cryptocurrencies) and partially stabilized through algorithms.

These stablecoins operate on the principle that the total value minted in stablecoins exceeds the actual value held in collateral, thus the term ‘fractional.’ They utilize algorithmic methods to maintain price stability, either by minting new coins when the price rises above a certain threshold or burning coins when overcollateralized. This approach aims to enhance capital efficiency by reducing the need for large amounts of idle collateral.

The fractional model allows for a larger circulating supply of stablecoins than the available liquidity or collateral. This system is designed to use economic incentives and game theory to prevent potential bank runs, offering a more flexible and efficient approach to maintaining value stability.

Fractional stablecoins are seen as a middle ground between fully collateralized stablecoins and purely algorithmic stablecoins. They address the challenges of bootstrapping and extreme volatility that purely algorithmic stablecoins face, while still offering more flexibility and efficiency than fully collateralized stablecoins. This makes them a significant innovation in the realm of decentralized finance (DeFi), providing a more scalable and stable digital asset option.

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