Collateral ratio indicates the value of assets held as security relative to the value of a loan or debt position, typically expressed as a percentage. In decentralized finance, this metric is crucial for lending protocols, where users over-collateralize their loans to mitigate default risk. A higher collateral ratio provides greater security for the lender, while a lower ratio carries increased liquidation risk for the borrower. It functions as a primary risk management tool within crypto lending platforms.
Context
Maintaining an optimal collateral ratio is a constant concern for participants in DeFi lending, particularly during periods of market volatility. Frequent discussions involve the dynamic adjustment of these ratios by protocols in response to asset price fluctuations. Future developments may include more sophisticated liquidation mechanisms and oracle solutions to ensure accurate and timely collateral valuations. This enhances market stability.
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