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.