How Does the Collateralization Ratio Relate to the Risk of a Death Spiral?

The collateralization ratio is crucial, especially for fractional or over-collateralized stablecoins. A lower ratio, or one based on volatile assets, increases the risk.

For purely algorithmic stablecoins, the ratio is effectively zero, making them inherently more vulnerable. If the market value of the backing collateral (or the governance token) drops too low, the mechanism to restore the peg becomes insufficient, accelerating the death spiral.