How Does the Collateralization Ratio Affect the Stability of a Stablecoin?

The collateralization ratio is the value of the collateral divided by the value of the stablecoin debt. A higher ratio, typically over 100 percent (overcollateralization), provides a larger buffer against price drops in the collateral asset.

This buffer increases confidence and stability. A lower ratio or undercollateralization makes the stablecoin highly vulnerable to sudden market downturns and increases liquidation risk.