Understanding BTC-Collateralised Stablecoins
What Is a BTC-Collateralised Stablecoin?
A BTC-collateralised stablecoin is a dollar-denominated token backed by Bitcoin held in on-chain vaults. Unlike fiat-backed stablecoins that rely on bank reserves and centralised custodians, BTC-collateralised stablecoins derive their value from verifiable cryptographic collateral. The core idea: deposit Bitcoin, borrow a stable dollar-equivalent token, and reclaim your BTC when you repay.
UNIT, the stablecoin governed by the Ducat Protocol, takes this model a step further by operating entirely on Bitcoin L1. There are no bridges, no wrapped tokens, and no dependency on external chains. Every vault, every liquidation, and every redemption settles directly on the Bitcoin base layer.
How Collateralisation Ratios Work
Collateralisation ratio (CR) is the relationship between the dollar value of locked BTC and the amount of UNIT borrowed against it. If you deposit 1 BTC worth $60,000 and borrow 30,000 UNIT, your CR is 200%. This overcollateralisation provides a safety buffer that protects both the borrower and the protocol against price volatility.
The Ducat Protocol enforces a minimum collateralisation ratio. If the value of your deposited BTC falls and your CR drops below the liquidation threshold, the protocol can partially or fully liquidate your vault to maintain system solvency. This mechanism ensures that every UNIT in circulation remains fully backed at all times, even during severe market downturns.
Why L1 Issuance Matters
Most stablecoin protocols in the Bitcoin ecosystem operate on Layer 2 networks or sidechains. While these solutions offer throughput advantages, they introduce trust assumptions that undermine the security guarantees that make Bitcoin valuable in the first place. Bridge exploits, sequencer failures, and validator collusion are not theoretical risks; they have resulted in billions of dollars in losses across the broader DeFi ecosystem.
By issuing UNIT directly on Bitcoin L1, the Ducat Protocol inherits the full security of the Bitcoin network. There is no bridge to exploit, no separate validator set to compromise, and no secondary consensus mechanism that could fail independently. Your collateral sits in a Bitcoin script that enforces the protocol rules at the base layer.
The Role of Oracles and Price Feeds
Accurate price data is critical for any collateralised lending protocol. The Ducat Protocol uses a decentralised oracle system that aggregates BTC/USD price feeds from multiple independent sources. These feeds are validated on-chain before being accepted, and the protocol includes circuit breakers that pause liquidations if price data appears anomalous.
This approach balances responsiveness with safety. The protocol needs fresh prices to trigger timely liquidations, but it also needs protection against oracle manipulation attacks that could trigger false liquidations or allow undercollateralised borrowing.
Comparing Approaches to BTC-Backed Stability
The stablecoin market includes several approaches to maintaining a dollar peg. Algorithmic stablecoins use supply expansion and contraction without direct collateral backing. Fiat-backed stablecoins hold dollar reserves in traditional bank accounts. Crypto-collateralized stablecoins lock volatile assets in overcollateralized positions.
Each approach carries different risk profiles. Algorithmic designs have repeatedly failed under stress. Fiat-backed tokens require trust in custodians and are subject to regulatory seizure. BTC-collateralised stablecoins on L1 offer a middle path: verifiable overcollateralisation without custodial risk, governed by code that settles on the most secure blockchain network in existence.
The Ducat Protocol is designed for users who want dollar liquidity without surrendering control of their Bitcoin. By keeping everything on L1, it preserves the properties that make BTC the preferred collateral asset for long-term holders.
Risks to understand
No protocol is risk-free. These are the three that matter most.
Liquidation risk. If Bitcoin's price falls sharply, your collateralisation ratio drops. If it falls below the protocol's minimum, your vault gets liquidated. Part of your BTC is sold to repay the debt. You keep the UNIT you borrowed, but you lose some collateral plus a liquidation penalty. The fix is simple: borrow conservatively. A 200% CR with Bitcoin at $90,000 needs a fall to roughly $45,000 before liquidation triggers. At 150% CR, a 34% drop is enough. See for practical numbers.
Oracle risk. The protocol relies on external price feeds to know what BTC is worth. If those feeds are wrong, delayed, or manipulated, the protocol might liquidate vaults too early or allow undercollateralised borrowing. Ducat uses a multi-source oracle design with on-chain validation. No single source can move the price unilaterally. explains how decentralised oracles reduce this attack surface.
Smart contract risk. The protocol logic is encoded in Bitcoin scripts and open-source code. Bugs are possible. The codebase has been audited, but audits don't catch everything. The practical mitigation: don't deposit more than you'd be comfortable losing in a worst-case scenario. Use the protocol with amounts that fit your risk tolerance.
For a broader comparison of borrowing options, the covers CeFi and DeFi alternatives side by side.
