Collateral Tiering

Collateral tiering is a risk management framework used by decentralized finance protocols and centralized exchanges to categorize assets based on their liquidity, volatility, and reliability. Instead of treating all assets as equal, the system assigns different haircut percentages or maximum borrowing limits to each asset.

High-quality assets like stablecoins or major cryptocurrencies typically enjoy higher loan-to-value ratios because they are easier to liquidate during market stress. Conversely, lower-tier assets with high volatility or thin order books are assigned stricter collateral requirements to protect the protocol from insolvency.

This mechanism ensures that the platform remains solvent even if a specific asset experiences a flash crash. It is a fundamental defense against systemic risk in leveraged trading environments.