How Does the Choice of Collateral (E.g. ETH Vs. a Basket of Tokens) Affect the Over-Collateralization Ratio?

The choice of collateral directly influences the required over-collateralization ratio. Highly volatile, single-asset collateral like ETH will necessitate a higher ratio (e.g.

150%) to absorb large, sudden price swings. A diversified basket of less-correlated tokens will generally allow for a lower required ratio (e.g.

120%) because the risk is spread out. The lower correlation means that a sudden drop in one asset's price is less likely to be mirrored by the others, reducing the overall liquidation risk for the system.