Under-Collateralization Prevention

Under-collateralization prevention encompasses all the technical and economic design choices intended to ensure that a protocol never reaches a state where liabilities exceed assets. This includes strict over-collateralization requirements, automated liquidation engines, and circuit breakers that pause operations during extreme events.

By building these protections directly into the smart contract logic, the protocol can self-regulate and maintain integrity without human intervention. The goal is to create a robust system that can withstand market shocks and maintain the peg of the wrapped asset under all conditions.

This is the core challenge of designing secure and sustainable financial derivative protocols.