What Is the Risk of Using Highly Correlated Assets as Stablecoin Collateral?

If the stablecoin is collateralized by multiple crypto assets that all tend to move in tandem (e.g. a basket of Layer 1 tokens), a major market downturn will cause all collateral values to drop simultaneously. This high correlation significantly increases the risk of mass liquidations and rapid under-collateralization, making the stablecoin more susceptible to a systemic collapse.