Collateral Ratio Threshold

The collateral ratio threshold is the minimum percentage of collateral required to maintain a loan or a derivative position before it becomes eligible for liquidation. This parameter is the primary defense against systemic insolvency in a protocol.

By setting a conservative threshold, the protocol provides a buffer against price drops in the underlying collateral asset. If the ratio falls below this limit, the protocol triggers a liquidation event.

The threshold is often dynamic, adjusting based on the volatility and liquidity of the collateral asset. Managing these thresholds is a delicate task that requires deep quantitative analysis to ensure the protocol is safe while remaining attractive to users who wish to leverage their assets.