Overcollateralization Ratio

Definition ∞ Overcollateralization Ratio is a metric signifying that the worth of assets committed as security for a loan surpasses the value of the loan itself. This proportion is frequently utilized in decentralized finance lending protocols to lessen the danger connected with unstable digital asset security. By demanding borrowers to supply more value in collateral than they acquire in a loan, the system establishes a safeguard against price declines. If the collateral’s worth descends below a preset limit, a portion or all of it might be liquidated to shield the lender’s capital.
Context ∞ Conversations concerning overcollateralization ratios often address their function in preserving the financial health and steadiness of decentralized lending platforms. A central discussion point involves refining this ratio to balance capital effectiveness for borrowers with ample security for lenders, especially during times of severe market instability. Important future advancements include adaptable overcollateralization frameworks that modify based on market circumstances and sophisticated risk assessments to offer more subtle security prerequisites.