How Stablecoins Work: Building Your Own with Solidity

What is a Stablecoin?

A stablecoin is a token pegged to a stable asset (typically the USD) and can be backed by:

Fiat (e.g. USDC, USDT)
Crypto (e.g. DAI)
Algorithms (e.g. UST — RIP)

This post walks you through building a basic collateralized stablecoin like DAI.

Architecture Overview

Stablecoin Design

Smart Contract Code

solidity
// Collateral-backed stablecoin
contract StableCoin {
    IERC20 public collateral;
    uint public collateralRatio = 150; // 150%
    mapping(address => uint) public balances;

    constructor(address _collateral) {
        collateral = IERC20(_collateral);
    }

    function mint(uint amount) external {
        uint required = (amount * collateralRatio) / 100;
        require(collateral.transferFrom(msg.sender, address(this), required), "Transfer failed");
        balances[msg.sender] += amount;
    }

    function redeem(uint amount) external {
        require(balances[msg.sender] >= amount);
        balances[msg.sender] -= amount;
        uint refund = (amount * collateralRatio) / 100;
        collateral.transfer(msg.sender, refund);
    }
}

Key Risks

Collateral Volatility: Falling collateral value can lead to under-collateralization
Oracle Manipulation: Always use decentralized oracles

Tip: Simulate Liquidation

To fully grasp how DAI works, build a liquidation mechanism that sells collateral when it's under-collateralized.