Collateralization

Measures total reserve coverage, including any dedicated insurance vehicles, relative to outstanding token supply. For Alternative Asset and Active Strategy Stablecoins, collateralization is assessed within the Asset Quality framework via Monte Carlo or Black-Cox modeling.

Coverage is scored on a non-linear curve. Sub-80% coverage carries a steep, accelerating penalty because the failure mode is a reflexive bank run, not gradual deterioration. Coverage near 100% is the baseline expectation; over-collateralization above approximately 120% earns a positive adjustment. A Haircut-Adjusted Collateralization Ratio reflects asset-quality discounts on the reserve composition, and the User Rights segregation haircut compounds with it.

Tier	Reasoning	Evidence
Sub-80% (insolvency zone)	Mathematical insolvency under any realistic stress: even modest asset drawdowns make full recovery implausible without external capital, and visible undercollateralization triggers self-reinforcing run dynamics rather than orderly price discovery.	UST/LUNA collapsed from approximately $18B market cap to near zero within 72 hours of peg visibility erosion in May 2022. Iron Finance demonstrated the same reflexive dynamic at a 75% partial-backing threshold in June 2021. IRON stablecoin produced an identical pattern.
80% to 95% (fragility zone)	Technically solvent at a point in time but structurally precarious; stated solvency depends entirely on no asset drawdown occurring before reserves can be replenished, and modest stress pushes the protocol into the insolvency zone.	The 2021 NYAG investigation revealed Tether held approximately 49% in unspecified cash equivalents during portions of 2017–2018. S&P's November 2025 USDT assessment cited a 3.9% overcollateralization margin against approximately 5.6% BTC reserve exposure — a single 30% BTC drawdown would consume the entire buffer.
95% to 105% (baseline)	Marginal coverage: par is not a safe state because it is the minimum condition for solvency before accounting for real-world frictions — liquidation costs, mark-to-market noise, haircut-adjusted asset quality.	Parity coverage is the institutional standard reflected in FSB and Basel framework expectations that liabilities are fully matched by reserves. USDC and PYUSD operate at or near this band.
105% to 120% (resilient)	Meaningful buffer that can absorb modest haircuts and frictions without falling below par. Rewards are intentionally bounded because overcollateralization eliminates one failure mode but operational, governance, and legal risks remain.	Aligned with Basel-style stress testing tolerances. USDS (Sky), crvUSD, and LUSD operate at or above this band.
Over 120% (over-collateralized)	Substantial buffer calibrated to absorb underlying asset volatility, appropriate for backings whose price movements require explicit volatility cushion. Reward is capped to preserve the asymmetry between binary downside and bounded upside.	Minimum collateralization ratios in algorithmic CDP designs (typically at or above 110%) are set above parity to absorb collateral drawdowns under stress. Performance through the 2018, 2020, and 2022 stress events supports the buffer's effectiveness. Liquity LUSD's 110% MCR plus 150% Total Collateral Ratio Recovery Mode is canonical.