How Does Over-Collateralization Affect Capital Efficiency?

Over-collateralization is capital inefficient because it requires locking up more value than is borrowed or minted. For example, to get $100 of stablecoin, a user must lock $150 of volatile assets, meaning $50 of capital is tied up and not earning a return.

This trade-off is accepted to ensure the stability and security of the decentralized stablecoin.