# Dynamic Collateralization ⎊ Area ⎊ Resource 3

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## What is the Adjustment of Dynamic Collateralization?

Dynamic collateralization refers to the automated adjustment of collateral requirements in real-time based on prevailing market conditions. This mechanism aims to optimize capital efficiency by lowering collateral ratios during periods of low volatility and increasing them during high-volatility events. The adjustment process is typically governed by a smart contract and driven by oracle data feeds.

## What is the Risk of Dynamic Collateralization?

The primary risk mitigation function of dynamic collateralization is to protect against sudden market movements that could render a position undercollateralized. By proactively adjusting requirements, the system reduces the likelihood of cascading liquidations during stress events. However, the model introduces complexity in determining the appropriate adjustment parameters.

## What is the Volatility of Dynamic Collateralization?

Volatility serves as a key input for dynamic collateralization models, directly influencing the required collateral ratio. Higher volatility increases the probability of rapid price changes, necessitating a larger buffer to absorb potential losses before liquidation. The system's responsiveness to volatility changes is critical for maintaining solvency and preventing systemic risk.


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## [Systemic Solvency Monitoring](https://term.greeks.live/term/systemic-solvency-monitoring/)

## [Proactive Monitoring Systems](https://term.greeks.live/term/proactive-monitoring-systems/)

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**Original URL:** https://term.greeks.live/area/dynamic-collateralization/resource/3/