The most controversial stablecoins fall within this category because they use other cryptocurrencies to keep their value stable. Different mechanisms are used to achieve this.
An example is DAI, a cryptocurrency that uses the Etherum platform and the value of the ether to keep its cryptocurrency “pegged” to the dollar. In this case, users don't buy the DAI cryptocurrency directly; instead, they “generate” it in exchange for ethers, which are exchanged in the platform by way of a deposit. The stablecoin avoids volatility caused by ether fluctuations because users are required to deposit more ethers than necessary. This mechanism is called overcollateralization and involves providing excess collateral in exchange for funding in order to reduce the risk. This is how users would be able to “protect themselves” from a possible drop in the cryptocurrency value.
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