Another class of stable coin tries to achieve stability in a slightly more decentralized way, by pegging not to fiat, but to other types of asset instead. As with tethers, credibility rests primarily on the degree to which the coin is backed by the reference asset.

These can be either traditional assets, such as equities or commodities, or other crypto-assets. The peg can be based on single instruments or a portfolio. The intention is to produce a less volatile asset for investment purposes, but not to maintain parity with a given fiat currency.

In the case of coins backed by a portfolio of assets, some of the idiosyncratic risks of the various underlying instruments are diversified away. The overall degree of stability depends on how much of that idiosyncratic risk is eliminated. But even if all of the idiosyncratic risks is diversified away, there remains a market risk. This relates to changes value due to shocks that affect the prices of all of the assets in the portfolio in a correlated way.

In addition, there are major scaling problems with this approach, due to the liquidity demands from inflows and outflows to the collateral pool. In order to accommodate flows into and out of the stable coin, the collateral used to back it must be highly liquid, so that assets can be readily bought and sold without affecting their price. If flows out of the coin cause the price of the underlying to fall, the entire market capitalization of the cryptocurrency should decline to reflect that.

That liquidity requirement is at present not met for a crypto-asset backed coin, making such stable coins extremely vulnerable to runs. In a rush to sell, investors may find themselves unable to exit, because the underlying is illiquid. Fire sales of either the collateral or the coin or both would be the likely result. Even those coins backed by relatively liquid, traditional assets, are still vulnerable to losses arising from negative feedback loops like this.

While the aim of reducing reliance on fiat as a safe store of value is laudable, there is still a large degree of centralization in the administration of such coins. Again, this renders them vulnerable to attack.

This class of stable coin is perhaps better thought of as a form of collateralized portfolio investment vehicle, which reduces, but does not eliminate, volatility. They are also exposed to liquidity constraints in the event of runs and are at risk of potentially very sharp swings in value under stressed conditions - that is, precisely when investors need stability.