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.