Solvency Ratio

The solvency ratio is a financial metric that measures a company's or protocol's ability to meet its long-term debt obligations. In the context of crypto-lending, it compares the total value of the collateral held by the protocol against the total value of the loans it has issued.

A healthy solvency ratio indicates that the protocol has enough assets to cover all potential withdrawals and loan defaults. If the ratio falls too low, it suggests that the protocol is under-collateralized and at risk of insolvency.

This is particularly important for protocols that use complex assets like staked tokens, where the value of the collateral is subject to both market fluctuations and network-specific risks. Monitoring this ratio is a core responsibility of governance and automated risk management systems.