Collateralization ratio

A collateralization ratio is calculated as the value of the collateral divided by the value of the debt, multiplied by one hundred. Lending markets and collateralized debt positions in decentralized finance require overcollateralization, meaning a ratio above 100 percent, for example 150 percent, because the collateral is volatile and there is no credit recourse against the borrower. The key parameters that accompany it are the maximum LTV or loan-to-value, which is its inverse, the liquidation threshold, the liquidation penalty and the protocol's minimum ratio. If the collateral price falls and the ratio drops below the minimum, the position is liquidated.

This variable is central to decentralized lending because it defines available leverage, the safety margin and the liquidation risk for the user, and it keeps the protocol solvent against volatility. In a collateralized debt position or CDP, the user locks collateral and mints a stablecoin or debt against it, with a minimum ratio that differs by collateral type.

Protocols that use this concept include MakerDAO, now Sky, whose CDPs mint DAI or USDS, Liquity with its LUSD stablecoin and an individual minimum of 110 percent, and Aave and Compound, which apply per-asset LTV and thresholds. The specific ratio figures per asset are governable and change over time, so it is best to check them in the protocol before transacting. In the European Union, overcollateralized stablecoins and their associated services fall under MiCA according to their category.