What Is the Role of Over-Collateralization in Securing a Synthetic Asset?

Over-collateralization is a security mechanism where the value of the collateral locked in the smart contract is significantly greater than the value of the synthetic asset issued. For example, $150 of ETH might be locked to mint $100 of a synthetic asset.

This buffer protects the system against price volatility in the collateral asset. If the collateral's price drops, the system has a margin of safety before the synthetic asset becomes under-backed, ensuring the asset maintains its price peg.