Collateral Ratio Calibration

Collateral ratio calibration is the setting of the minimum value of assets required to back a loan or synthetic position. This ratio is a primary defense against insolvency.

Setting it too high limits user access and capital efficiency, while setting it too low increases the risk of under-collateralization during price drops. Calibration involves analyzing asset volatility and liquidity to determine appropriate buffers.

This is a dynamic process that must be updated as market conditions evolve. It serves as a foundational risk management parameter that protects the integrity of the protocol debt pool.