Definition ∞ The collateralization ratio represents the value of collateral securing a loan or a stablecoin relative to the value of the asset being borrowed or minted. It indicates the extent to which an asset is over-collateralized, providing a safety buffer against price fluctuations. A higher ratio suggests a more secure position for the lender or the stablecoin’s stability.
Context ∞ In decentralized finance (DeFi) and stablecoin protocols, the collateralization ratio is a key metric for assessing risk and stability. Protocols often implement liquidation mechanisms that trigger when this ratio falls below a predetermined threshold, ensuring the solvency of the system. Monitoring and managing collateralization ratios is critical for users participating in lending platforms and for the peg maintenance of algorithmic stablecoins.
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