Originally the stablecoin concept was introduced in the BitShares project and was called a “market-pledged asset”. It was designed to be a fully decentralized digital asset such as cryptocurrency but to be traded at the value of some stable asset such as fiat currency (e.g. USD). This concept was modified and largely popularized by the MakerDAO project and DAI stablecoin. These projects use cryptocurrency as the underlying asset. A cryptocurrency, for example, ETH, is locked into a special smart contract that in return mints a corresponding amount of stablecoins. In most cases, the minted amount is lower than the real market price of the underlying asset. This allows the protocol to handle the volatility of the underlying asset. When the price of the underlying asset drops below a predefined threshold, the protocol triggers a liquidation mechanism (which can be implemented differently in each specific protocol) and liquidates the underlying asset to cover the amount of stablecoin originally issued. Generally speaking, the protocol lends stablecoins denominated to some stable currency to a user in exchange for cryptocurrency. Users at any time can return the stablecoin and unlock/return their collateral (usually cryptocurrency). Some protocols charge interest rates for such decentralized loans.
This is indeed a very powerful concept and it has the potential to be applied for an even bigger use case. We found a mechanism to apply this concept to tokenized intangible assets as collateral for stablecoin - we call it “Dynamic Liquidity Protocol”. Intangibles lack liquidity and with the Dynamic Liquidity Protocol, liquidity of such assets can be dramatically increased. In further chapters, this concept will be explained in detail.