Collateral Health

Definition ∞ Collateral health is a metric utilized in decentralized finance (DeFi) lending protocols to evaluate the safety margin of a user’s collateralized loan position. It indicates how close a loan is to liquidation, typically expressed as a ratio comparing the value of deposited collateral to the borrowed amount. A higher collateral health score signifies a more secure loan, less susceptible to market fluctuations. This metric is crucial for borrowers to avoid automatic liquidation of their assets.
Context ∞ Monitoring collateral health is a daily activity for participants in DeFi lending markets, particularly during periods of high market volatility. News often reports on system-wide collateral health trends, indicating potential stress points in protocols or the broader market. Developments in automated liquidation mechanisms and risk management dashboards continually refine how users and protocols manage and assess collateral health, aiming for greater stability in decentralized lending.