How Do Fluctuating Asset Prices Impact the Collateralization Ratio of a Stablecoin?

If the underlying collateral is a volatile asset (like ETH or BTC), a price drop in that asset will decrease the numerator of the collateralization ratio, lowering the overall ratio. This increases the risk of under-collateralization and potential liquidation.

Conversely, a price increase raises the ratio, making the system safer but potentially less capital efficient.