Risk Based Collateralization

Risk based collateralization is the practice of evaluating the quality and liquidity of various assets to determine how much they can contribute to a margin account. Not all assets are treated equally; volatile or illiquid assets may have lower collateral value than stablecoins or blue-chip assets.

This prevents the protocol from being exposed to assets that might be difficult to sell during a crisis. By assigning a risk score to each collateral type, the protocol ensures that its backing remains robust.

This is a fundamental principle of sound financial design in decentralized lending and derivatives.