Ok, so fundamentally it's heavily discounting the collateral. I guess that makes it safer, but doesn't that mean you need way more collateral to support it and therefore you're paying a really high cost of capital?
I can support $1Bn of stablecoin if I have $1Bn of USD in reserve, but to support $1Bn of stablecoin in this case I'd need $6.7Bn of BTC in reserve. Sounds expensive surely?
The trick is a technique called "traunching". You take your 1 BTC token and sell the bottom 20% of its market value as a stable coin, and sell top 20% as a derivative with exposure to Bitcoin, leveraged say, 3:1.
If the BTC price collapses the people who bought your leveraged coin get wiped out, and effectively pay off the bottom guys.
This is why leveraged Bitcoin pawn-style loans are all over the place.
So this relies on finding someone stupid enough to lever up 3x on the most volatile asset around? And not just someone, hundreds of millions of dollars of market cap worth of someones?
Yes. But hey, if you believe crypto is only going to ever goes up, as many crypto believers do, it makes a lot of sense to borrow against your coins rather than selling and facing a capital gains tax charge.
Borrow $90K against $100K worth of Bitcoin. Buy $90K more crypto, borrow $81K agains that, buy $81K worth more crypto. Rinse, repeat. Before you know it, you have 10:1 leverage and all your crypto is held with Nexo, or whatever shadey platform you're using that automates this.
Oh, and all this crypto being bought on leverage of course increases the volatility and pumps the price.
I can support $1Bn of stablecoin if I have $1Bn of USD in reserve, but to support $1Bn of stablecoin in this case I'd need $6.7Bn of BTC in reserve. Sounds expensive surely?