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Explain the Concept of ‘Over-Collateralization’ in the Context of Crypto-Backed Stablecoins

Depositing a higher value of volatile crypto collateral (e.g. $150) than the stablecoin minted (e.g. $100) to create a buffer against price drops.
Greeks.Live22.11.25

Explain the Concept of ‘Over-Collateralization’ in the Context of Crypto-Backed Stablecoins.

Over-collateralization is a mechanism where the value of the deposited cryptocurrency collateral is significantly greater than the value of the stablecoin minted. For instance, a user might deposit $150 worth of Ether to mint $100 of a stablecoin.

This is necessary because the underlying crypto collateral is highly volatile. The excess collateral acts as a buffer to absorb price drops in the collateral, helping the stablecoin maintain its peg and preventing immediate liquidation during market downturns.

It is a key feature of decentralized stablecoins.

How Do Algorithmic Stablecoins Differ from Asset-Backed Stablecoins?
How Do Decentralized Finance (DeFi) Protocols Use Over-Collateralization to Manage Risk in Derivatives?
What Is the Risk Profile of an Algorithmic Stablecoin versus a Fiat-Backed Stablecoin?
What Are the Three Main Types of Stablecoins (Fiat-Backed, Crypto-Backed, Algorithmic)?

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