Definition ∞ Collateral ratios indicate the proportion of value between an asset pledged as security and the amount of a loan or debt issued against it. In decentralized finance, these ratios are crucial for maintaining the solvency of lending protocols, ensuring that borrowed funds are adequately backed. A higher ratio signifies greater security for the lender, mitigating default risk in volatile markets. Protocols often require over-collateralization to absorb price fluctuations.
Context ∞ Discussions about collateral ratios frequently focus on their dynamic adjustment mechanisms in response to market volatility and the liquidation thresholds that protect protocol integrity. A key debate involves optimizing these ratios to balance capital efficiency for borrowers with security for lenders, especially during periods of extreme price movements. Future developments will likely include more sophisticated oracle systems and risk management models to refine these ratios automatically.
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