What Are the Risks of Using Volatile Crypto Assets as Collateral for a Stablecoin?

Using volatile crypto assets (like Bitcoin or Ethereum) as collateral introduces significant risk to a stablecoin's peg. If the collateral's price drops sharply, the stablecoin can quickly become undercollateralized.

This necessitates forced liquidation of the collateral, which adds selling pressure to the market and further drives down the collateral's price. This feedback loop is a direct path to a death spiral, as the stablecoin's backing erodes rapidly.