What Is the Risk of Using Volatile Crypto-Assets as Collateral for a Stablecoin? ▴ Learn

What Is the Risk of Using Volatile Crypto-Assets as Collateral for a Stablecoin?

The primary risk is a cascading liquidation event during a sharp market downturn. If the price of the volatile collateral drops rapidly, many collateralized debt positions (CDPs) may fall below the liquidation threshold.

This forces the protocol to sell the collateral quickly, further driving down its price and potentially creating a liquidity crisis that could break the stablecoin's peg.

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