How Does a "Put Option" on the Collateral Asset Protect against a Death Spiral? ▴ Learn

How Does a “Put Option” on the Collateral Asset Protect against a Death Spiral?

A protocol could buy put options on its collateral asset (e.g. Bitcoin) at a predetermined strike price.

If the collateral price crashes, the put option gains value, providing a guaranteed payout. This cash injection can be used to buy back the stablecoin or recapitalize the protocol, effectively providing an external hedge that protects against the catastrophic loss of collateral value.

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