# A “perfectly collateralized” stablecoin

By [yikyin](https://paragraph.com/@yikyin) · 2022-04-06

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One manifestation of composability is [UXD](https://uxd.fi/), an algorithmic stablecoin – a subject we covered in some detail in our deep dive into [Terra](https://www.readthegeneralist.com/briefing/terra). Like Terra, UXD is genuinely decentralized. Unlike Terra, UXD is collateralized; or as Jain described it, “exactly, perfectly collateralized.”

How does UXD do this? By following a “delta-neutral” strategy – simultaneously going long on a spot trade and short on a future contract. 

This can get a little confusing, so let’s use an example. Imagine you want $100 worth of UXD. To get it, you would open UXD’s application and deposit $100 worth of cryptocurrency – SOL, for example. In exchange, you would receive precisely 100 UXD, which you could then spend, save, or swap across the crypto-verse. If you want to redeem your UXD for dollars at any point, you can do so at a rate of 1:1. 

UXD can retain this price stability with a nifty mechanism. When you trade your $100-worth of SOL for the stablecoin, UXD deposits that money on a decentralized exchange where it acts as collateral. It then takes two positions, going spot long SOL with $50-worth and perpetual short with the other $50. A balance is achieved: if the price of SOL falls by 10%, the short position increases by 10%, and visa-versa. Volatility is absorbed by this architecture — assuming platforms and counter parties function as promised — allowing for a scalable, decentralized, collateralized stablecoin. 

For UXD to work, two composable elements are necessary: a decentralized spot exchange like Serum and a spot and futures exchange like Mango Markets. By leveraging those Legos, UXD looks set to bring a truly different stablecoin to market.

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*Originally published on [yikyin](https://paragraph.com/@yikyin/a-perfectly-collateralized-stablecoin)*