What Are the Primary Risks Associated with Using Volatile Crypto Assets as Collateral?

The main risk is a 'cascade of liquidations' during a severe market downturn. A sharp drop in the collateral's price can trigger mass liquidations, which in turn puts further downward pressure on the asset's price, creating a death spiral.

Another risk is price oracle failure or manipulation, where incorrect price data could lead to wrongful liquidations. Smart contract bugs or exploits also pose a significant threat, potentially allowing attackers to steal collateral.

Lastly, network congestion can prevent borrowers from adding collateral in time to avoid liquidation.