> For the complete documentation index, see [llms.txt](https://tharwa.gitbook.io/tharwa/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://tharwa.gitbook.io/tharwa/the-opportunity/why-other-models-fall-short/overcollateralized-stablecoins.md).

# Overcollateralized Stablecoins

Overcollateralized stablecoins were designed to solve the failures of algorithmic models, and they did bring more stability. But in doing so, they introduced a new set of problems: inefficiency, yield stagnation, and limited real-world utility.

Protocols like DAI, GHO, and crvUSD are often seen as “safer” because they require users to deposit more value than they mint. But these systems still struggle with scale, composability, and meaningful returns for holders.

They solve for solvency. They don’t solve for utility.

### What Are Overcollateralized Stablecoins?

These are stablecoins that can only be minted by locking up a greater amount of another asset. Common structures include:

* **DAI**: Backed by ETH, stETH, USDC, and other assets, often requiring 120–150% collateralization.
* **GHO**: Minted against Aave collateral, with protocol-native governance and interest-sharing.
* **crvUSD**: Uses LLAMA-based soft liquidations and on-chain backing via Curve's liquidity system.

The collateral stays locked while the stablecoin is in circulation, and liquidation mechanisms are used to prevent insolvency.

### Why They Fall Short

#### 1. **Capital Inefficiency**

Overcollateralization ties up excess capital. Users lock $1.50 to mint $1 of stablecoin which limits scale and adoption. Capital sits idle or underutilized.

#### 2. **Low or Zero Yield**

Holding the stablecoin often provides no yield. Most of the yield goes to the collateral provider or the protocol. Users holding DAI or GHO aren’t earning anything unless they manually stake or deposit into external pools.

#### 3. **Reflexive Liquidation Risk**

When crypto prices fall, liquidations cascade through the system. If your stablecoin is backed by ETH, and ETH drops 30%, the system is forced to liquidate collateral to protect solvency, often creating volatility in the process.

#### 4. **RWA Integration Is Still Nascent**

Many of these systems are trying to integrate real-world assets (like DAI's use of sukuk vaults or tokenized credit), but they weren't designed for that purpose. It's retrofitted and constrained by governance complexity or custodial trust assumptions.

### DAI: The Best Example of Its Kind

DAI remains the most successful overcollateralized stablecoin, but even it has drifted far from its original vision:

* 60–70% of DAI is now backed by USDC
* Real yield to holders is limited
* Its complexity has grown, introducing DAO governance friction
* RWA adoption is partial, siloed, and still gated by Maker governance

It works, but it doesn’t scale capital effectively or provide strong incentives for average users.

### Why Tharwa Is Different

thUSD is fully collateralized but not overcollateralized. It doesn’t require users to lock up excess value or hold volatile assets to mint stablecoins.

Instead, Tharwa:

* Accepts stablecoin inflows that are converted into yield-bearing real-world assets
* Routes capital through vaults that generate actual returns
* Distributes those returns via staking (sthUSD) or vault exposure
* Maintains peg defense with real reserves, not liquidation triggers
* Is structured around active capital efficiency, not just passive solvency

The result is a stablecoin that’s useful, yield-connected, and scalable without requiring 150% of locked collateral just to get started.


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