How Does the Volatility of the Collateral Asset Affect Margin Requirements?

The volatility of the collateral asset directly impacts the margin requirements set by the smart contract protocol. If the collateral asset (e.g. a highly volatile altcoin) is prone to sudden, large price swings, the protocol must demand a higher initial and maintenance margin.

This higher requirement acts as a buffer to ensure that the protocol has enough time and value to liquidate the position before the collateral's value drops below the debt, preventing the protocol from incurring bad debt.