How Does a De-Pegged Stablecoin Affect the Collateralization Ratio of a Lending Protocol?

Lending protocols rely on the stablecoin as a reliable measure of value for collateral and debt. If a stablecoin used as collateral de-pegs (e.g. drops to $0.50), the actual value of the collateral is halved, even if the protocol still records it at $1.

This immediately and drastically lowers the collateralization ratio for all loans using it. It triggers widespread undercollateralization, leading to a cascade of liquidations to restore the ratio, further destabilizing the market.