Collateralization Ratio

The collateralization ratio measures the relationship between the value of a user collateral position and the value of outstanding debt. It is a fundamental risk metric in DeFi lending systems.

In simplified form, the ratio is calculated as collateral value divided by debt value. For example, if a user has 150 units of collateral and 100 units of debt, the collateralization ratio is 150%.

A higher ratio provides a larger buffer against adverse price movements. If the collateral price declines while the debt remains similar, the ratio falls. Once the position reaches a protocol-defined risk level, liquidation may become possible.

The collateralization ratio should be distinguished from the liquidation threshold. The ratio describes the current state of a position, while the liquidation threshold is a protocol parameter defining when a position becomes eligible for liquidation. Some protocols also use loan-to-value as the inverse-style measure of debt relative to collateral.

The calculation depends on market prices supplied through a price oracle. Oracle reliability is therefore directly connected to the accuracy of collateral-risk calculations.

A borrower can generally improve the ratio by adding collateral or repaying debt. Both actions increase the safety margin of the position and reduce the probability of liquidation under moderate adverse price movements.