Collateral Ratio Buffering

Collateral Ratio Buffering is the practice of maintaining an excess amount of collateral within a position or a protocol to absorb unexpected market shocks. It serves as a safety net that prevents a position from hitting the liquidation threshold immediately upon a minor price dip.

By setting the required collateral ratio well above the liquidation point, the system creates a cushion for volatility. This buffer is critical in cryptocurrency markets where prices can move significantly in very short timeframes.

Without sufficient buffering, the system is prone to high rates of liquidations that can exacerbate market downward pressure. Protocols often design these buffers to be dynamic, increasing during high volatility and potentially decreasing during calm periods.

It is a fundamental component of robust risk management in decentralized lending.