What Is the Capital Efficiency Trade-off of Over-Collateralization?

The trade-off is between security and capital efficiency. Over-collateralization provides a high degree of security against market volatility and peg failure, as the buffer absorbs losses.

However, it is capital inefficient because a significant portion of the deposited capital is locked up and unused, serving only as a buffer. For example, to mint $100, a user must lock up $150, meaning $50 is 'inefficiently' used.

This limits the total stablecoin supply that can be generated from a given amount of capital.