Collateral Volatility Buffer

The Collateral Volatility Buffer is the gap between the current market value of a collateral asset and its liquidation threshold. This buffer is designed to absorb short-term price swings without triggering a liquidation.

Protocols often apply a haircut to the value of collateral to create this margin of safety. A more volatile asset will typically have a larger required buffer to account for the increased risk of sudden price drops.

By maintaining a sufficient buffer, borrowers protect themselves from being liquidated during temporary market noise. It acts as a defense mechanism against the inherent volatility of the crypto market.

Sophisticated traders optimize this buffer to maximize capital efficiency while minimizing liquidation risk. The buffer size is a direct reflection of the protocol's risk appetite and the asset's historical performance.