Collateral Ratio Verification

Collateral ratio verification is the automated process of checking that a borrower's assets held in a protocol are sufficient to cover their debt obligations. Protocols use oracles to fetch the current market price of collateral and compare it against the outstanding loan amount to calculate the health factor.

If the ratio falls below a specific threshold, the contract automatically triggers a liquidation event to ensure the protocol remains solvent. This verification must be accurate and instantaneous, as even a small delay can result in bad debt if market volatility is high.

By keeping this process on-chain, protocols ensure that collateral management is transparent and immune to human bias or preferential treatment.