Collateralization ratio measures the value of deposited collateral relative to borrowed assets, expressed as a percentage that determines position safety in DeFi lending. Borrow $100 with $150 of collateral and your ratio is 150%. Lending protocols require minimum ratios, typically 110-200% depending on collateral volatility, to maintain solvency during price swings.
If your ratio falls below the liquidation threshold due to collateral depreciation or debt appreciation, your position faces liquidation. Higher ratios provide larger safety margins but reduce capital efficiency: 200% collateralization means half your capital sits as buffer rather than generating yield.
The optimal ratio balances safety against efficiency based on asset volatility and risk tolerance. Stablecoin collateral can safely operate at lower ratios than volatile assets. Multi-collateral positions complicate ratio calculations when different assets have different risk parameters.
Protocols calculate ratios using oracle prices, which introduces oracle risk, stale or manipulated prices can trigger incorrect liquidations or allow undercollateralized borrowing. Understanding collateralization ratios is required for using DeFi lending without getting liquidated: monitor ratios, set alerts, and maintain buffers appropriate to your collateral's volatility.
Interactive Visualizer
Collateralization Ratio Visualizer
Explore how collateral and borrowed asset values affect your DeFi lending position safety
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How It Works
The collateralization ratio = (Collateral Value ÷ Borrowed Amount) × 100. When your collateral loses value or your debt increases, the ratio drops. If it falls below the protocol's liquidation threshold, your position may be liquidated to protect lenders.