Solvency Requirements

Solvency requirements are the financial rules that dictate a protocol must maintain sufficient assets to cover all potential liabilities at any given time. In decentralized lending or derivative platforms, these are often enforced through collateralization ratios and automated liquidation mechanisms.

If the value of the collateral falls below a certain threshold, the system triggers a liquidation to maintain solvency. These requirements are essential for preventing insolvency and protecting users' funds.

They represent the economic invariants that must be upheld by the protocol's code. Failing to meet these requirements can lead to systemic risk and contagion across the DeFi ecosystem.

They are the core of risk management in decentralized finance.