Mexico's Alvarez, who knocked out Briton Amir Khan in his last fight in May, has lost just one of 49 pro bouts, to Floyd Mayweather on points in 2013.
He is favourite to beat WBO light middleweight champion Smith, 28, when they meet on Saturday.
"I need tests like this because I need a bit of fear in me to win," the Liverpudlian told BBC Sport.
"I need that fear factor in training otherwise I might get beat by someone I should never lose against, all because I couldn't get up in the morning.
"I don't want that to happen, so this fear I have in training will bring the best out of me when I face Alvarez."
Smith, who is unbeaten in 24 contests, won the WBO belt when he defeated USA fighter John Thompson in Manchester last October.
He believes victory over former WBC middleweight champion Alvarez on Saturday will establish him as a major force in world boxing, which is why he told his promoter, Frank Warren, he wanted the fight.
"I'm one win away from being a superstar," he said.
"This kind of fight is one I've asked for since I won the title. I could've kept kidding the public, kept taking money off Frank and said: 'I'm not ready to step up yet. Keep on giving me easy fights.'
"But as soon as I became world champion and they gave me the WBO belt, I've wanted to fight the big names ever since. I wanted to fight guys like Shane Moseley, Miguel Cotto and Alvarez. Now I have my chance."
Alvarez has been fighting since the age of 15 and demonstrated his punching power during his emphatic victory over Khan.
But Smith said: "In my frame of mind, I'm not going in that ring as the underdog and I'm not calling it an upset because I know I'm good enough to beat him.
"I will look for the knockout, because that's the way I fight. I want to get in there, break him down and stop him. And when I win and my hand is raised, I'll say to all those people that doubted me: 'I told you so.'"
Britain's Liam Smith says he is being driven on by fear as he attempts to beat Saul 'Canelo' Alvarez in Texas.