Collateralization ratio, in crypto-backed <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a> systems like DAI, is the ratio of a user's deposited collateral market value to the amount of stablecoins borrowed. For example, depositing $150 worth of ETH to borrow 100 DAI gives a collateralization ratio of 150%. The ratio must stay above the protocol's minimum threshold (typically 110%-150% depending on risk tier); if asset price drops cause the ratio to fall below the <a href="/en/glossary/derivatives-and-leverage/liquidation/" target="_blank">Liquidation</a> line, the system automatically sells collateral to repay the loan. Over-collateralization is the core safety buffer that keeps these stablecoins pegged, but also the fundamental reason for their low capital efficiency.

Crypto-backed stablecoins are stablecoins issued using crypto assets (like ETH, WBTC) as collateral through an overcollateralization mechanism. The representative project is DAI (issued by MakerDAO/Sky Protocol). The biggest difference from fiat-backed stablecoins: no centralized company holds dollar reserves — the entire issuance and <a href="/en/glossary/derivatives-and-leverage/liquidation/" target="_blank">Liquidation</a> process executes automatically on the blockchain, verifiable by anyone. The cost is low capital efficiency: you need to deposit more collateral than the amount you borrow (typically 150%+), with the excess serving as a safety buffer against crypto asset price volatility.

Overcollateralization is the core mechanism of crypto-backed stablecoins like DAI: borrowers must deposit collateral worth **more than** the stablecoins they borrow. For example, depositing $150 of ETH to borrow 100 DAI (150% collateral ratio). That 'extra $50' is the system's buffer against collateral price drops — ETH must fall 33% before the $150 collateral drops to $100 and triggers the <a href="/en/glossary/derivatives-and-leverage/liquidation/" target="_blank">Liquidation</a> line. Overcollateralization is the fundamental design that keeps decentralized stablecoins solvent, at the cost of low capital efficiency: the same money in an overcollateralized system can only borrow out 60-70%, with remaining capital sitting idle and locked.

WBTC (Wrapped Bitcoin) is Bitcoin's ERC-20 token form on Ethereum: users deposit Bitcoin into a regulated custodian (originally BitGo, partially shifted during 2023 controversy), receiving equivalent WBTC on Ethereum usable as collateral in DeFi protocols. Each WBTC is backed 1:1 by 1 BTC and can be redeemed at any time. WBTC is one of the most important non-ETH collateral assets for crypto-backed stablecoins (especially DAI) — Bitcoin's market cap and liquidity make it a core option for system collateral diversification. A 2023 BitGo custodian controversy briefly triggered market trust concerns about WBTC, but WBTC remains the primary Bitcoin cross-chain bridging asset.