Definition ∞ Collateral ratio failure occurs when the value of collateral securing a loan in decentralized finance (DeFi) falls below a predetermined threshold. This event typically triggers an automatic liquidation of the borrower’s collateral to repay the outstanding loan. It represents a critical risk management mechanism in overcollateralized lending protocols. Such a failure can result in significant losses for the borrower.
Context ∞ News regarding collateral ratio failures frequently surfaces during periods of high market volatility in digital asset markets. These events often precede broader discussions about liquidation mechanisms and risk exposure within DeFi platforms. Understanding this concept is essential for comprehending reports on protocol stability and user asset security in decentralized lending.
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