Why Is 'Over-Collateralization' Necessary for Crypto-Backed Stablecoins? ⎊ Path

Why Is ‘Over-Collateralization’ Necessary for Crypto-Backed Stablecoins?

Over-collateralization is essential because the backing assets (cryptocurrencies like ETH or BTC) are highly volatile. A sudden, sharp price drop in the collateral could quickly render the stablecoin under-collateralized if the ratio were 1:1.

The extra collateral acts as a safety buffer, absorbing volatility and ensuring that even after a significant market crash, there is enough value to cover the stablecoin's redemption value.

Why Is the Maintenance Margin Typically Lower than the Initial Margin?

How Does the Collateralization Ratio Differ between Algorithmic and Fully Backed Stablecoins?

How Do Algorithmic Stablecoins Differ from Asset-Backed Stablecoins?

How Does a Volatile Collateral Asset Affect the Required Collateralization Ratio?

What Is “Over-Collateralization” and Why Is It Common in DeFi?

What Is the Difference between a ‘Fiat-Backed’ and a ‘Crypto-Backed’ Stablecoin?

Explain the Role of Collateralization Ratios in the Stability of a Crypto-Backed Stablecoin

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Glossar

Crypto-Backed

Collateral ⎊ Crypto-backed arrangements represent a novel form of secured finance within decentralized ecosystems, utilizing digital assets as underlying collateral for derivative contracts or loan facilities.