How Does a Decentralized Stablecoin’s Collateral Ratio Impact Its Stability?
A higher collateral ratio indicates greater resilience against market volatility. If the ratio is 150%, the collateral can absorb a 33% drop in value before becoming under-collateralized.
A lower ratio, closer to 100%, offers less buffer, making the stablecoin more vulnerable to sudden market crashes and increasing the risk of liquidation cascades. Therefore, a high, well-managed ratio is key to maintaining stability and user trust.
Glossar
Collateral Ratio Adjustment
Adjustment ⎊ The collateral ratio adjustment represents a dynamic recalibration of margin requirements within derivative trading systems, particularly prevalent in cryptocurrency lending platforms and options markets.
Collateral Ratio
Margin ⎊ The collateral ratio, fundamentally, represents the proportion of deposited assets to borrowed value within a cryptocurrency lending or derivatives platform, directly influencing systemic risk exposure.
Collateral Ratio Impact
Exposure ⎊ The 'Collateral Ratio Impact' directly governs the maximum permissible leverage or notional exposure an entity can take relative to its posted collateral base.
Maintaining Stability
Resilience ⎊ Maintaining stability within cryptocurrency markets necessitates a robust resilience to exogenous shocks and endogenous volatility, demanding strategies that account for non-stationary distributions and tail risk events.