Overcollateralization

Crypto-collateralized stablecoins often require collateral ratios above 100% because the backing assets can be volatile. The excess collateral provides a buffer against adverse price movements before the position becomes undercollateralized. Regulatory frameworks can also require excess reserve value when backing assets expose holders to risks beyond the reference asset. The required buffer depends on asset volatility, liquidity, liquidation design, and risk limits.

A larger collateral buffer can absorb some asset-price declines before a position or reserve becomes insufficient, although it does not eliminate liquidity or liquidation risk.