Collateralization Ratio Requirements

Collateralization ratio requirements are the minimum amounts of assets that must be locked in a protocol to secure a loan or a derivative position. These requirements are designed to protect the lender or the protocol from the risk of the borrower defaulting.

If the value of the collateral falls below a certain threshold, the protocol triggers a liquidation to recover the debt. These ratios are a fundamental risk management tool in decentralized finance.

They must be set high enough to provide a buffer against market volatility but low enough to remain attractive to users. Determining the optimal ratio involves a trade-off between accessibility and security.

In times of high volatility, protocols may increase these requirements to mitigate systemic risk. Understanding these ratios is essential for any user participating in lending or leverage-based protocols.

They are the primary defense against insolvency in decentralized credit markets.