Price fluctuations will occur with on-chain collateral because collateral is held in a native protocol asset.

New York University

A model where assets are locked on the blockchain within a smart contract

On-chain collateral (backing model)

Schär, Fabian, Decentralized Finance: On Blockchain- and Smart Contract-based Financial Markets (March 8, 2020). Available at SSRN: https://ssrn.com/abstract=3571335 or http://dx.doi.org/10.2139/ssrn.3571335 



Decentralized Finance: On Blockchain and Smart Contract-based Financial Markets

On-chain collateral is transparent and secured by smart contracts. 

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