How Does a Volatile Collateral Asset Affect the Required Collateralization Ratio?
The more volatile the collateral asset, the higher the required collateralization ratio. A protocol must demand a larger safety buffer (higher ratio) for a volatile asset to mitigate the risk of a rapid price drop that could render the collateral insufficient to cover the debt.
Less volatile assets, like stablecoins, require a lower ratio.
Glossar
Safety Buffer
Margin ⎊ This represents the initial collateral posted to secure a leveraged derivatives position, acting as the primary financial cushion against adverse price movements.
Volatile Asset
Instability ⎊ A volatile asset, within cryptocurrency, options, and derivatives, exhibits a pronounced tendency toward rapid and substantial price fluctuations, exceeding the norms observed in more established financial instruments.
Volatile Collateral Asset
Definition ⎊ A Volatile Collateral Asset is a digital asset, typically a major cryptocurrency, whose market price exhibits high standard deviation and significant price swings, yet is accepted as security for margin or options contracts in the crypto derivatives market.
Required Collateralization
Mandate ⎊ Required Collateralization represents the mandatory minimum value of assets that must be deposited and maintained to support a leveraged position in crypto derivatives or decentralized lending platforms.