What Is the ‘Death Spiral’ Risk Associated with Over-Reliance on a Native Token for Collateral?

The death spiral occurs when a protocol's native token is used as collateral and its price falls, triggering mass liquidations. This forced selling further drives the token's price down, leading to more liquidations in a vicious cycle.

This is particularly dangerous for algorithmic stablecoins or lending protocols with high collateralization ratios of their own token. The spiral can quickly drain the protocol's reserves and lead to a total collapse of the token's value.