What Is the Main Risk Over-Collateralization Aims to Mitigate?

The main risk over-collateralization aims to mitigate is the sudden, severe drop in the value of the volatile cryptocurrency collateral. Since the stablecoin is backed by assets like Ether or Bitcoin, a rapid market crash could cause the collateral's value to fall below the value of the minted stablecoins.

Over-collateralization provides a necessary buffer to absorb these price shocks, ensuring the system remains solvent and the stablecoin maintains its peg, preventing a cascading liquidation event.