Crypto Terms: Letter D

What is Decentralization Ratio?

Decentralization Ratio MEANING:
Decentralization Ratio - the ratio of decentralized collateral value over the total supply of stablecoins backed for those assets.
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Let's find out Decentralization Ratio meaning, definition in crypto, what is Decentralization Ratio, and all other detailed facts.

The proportion of decentralized collateral value over the entire stablecoin supply backed by those assets is referred to as the Decentralization Ratio (DR). In other words, it’s a method to estimate how much of an asset's value derives from decentralized sources. It is a great way for assessing how risky an asset is. The DR considers all underlying components of collateral claimed by a protocol, not simply those contained inside its system contracts.

To calculate the off-chain risk of any stablecoin the DR can be used. Collateral with an excessive off-chain risk is considered to be 0% decentralized. Examples of such collaterals are fiat coins, custodial assets, and securities. Ethereum, on the other hand, and reward tokens such as CVX and CRV would be considered 100% decentralized.

Examples of off-chain risks include government entities freezing or interfering with assets, as well as compulsory KYC. A great example of this could be if the transfer of USDC to non-KYC businesses would be prohibited by the SEC. In addition, off-chain risks include risks related to the currency in which those assets are based, for example, US Dollar inflation for USDC.

To give you an example of how the DR is calculated, let’s take the FRAX3CRV LP token:

  • FRAX3CRV LP token consists of 50% FRAX and 50% 3CRV. Though we won’t take the FRAX part into account because it can’t back itself.
  • The 3CRV is made of 33% USDC, 33% USDT, and 33% DAI.
  • USDC and USDT are each made up of 100% fiat coins, while DAI is made up of 60% fiat coins.
  • Therefore, each $1 of FRAX3CRV LP token has around $0.066 ($1 x 0.5 x 0.33 x 0.4) or 6.6% worth of value coming from decentralized sources.