Collateralization Ratio
Also known as: Collateral Ratio, Loan-to-Value Ratio, DeFi Safety Metric
A metric that measures the value of collateral relative to the debt it secures, used to assess loan safety in DeFi.
The collateralization ratio is a percentage that expresses the value of collateral deposited compared to the amount borrowed or minted in DeFi protocols. A higher ratio indicates more safety, while a lower ratio increases the risk of liquidation. For example, a ratio of 150% means you must deposit $150 of collateral to borrow $100. Each protocol sets a minimum ratio, and if the value of collateral falls below this threshold, liquidation mechanisms may be triggered. Proper management of this ratio is key for users in lending, borrowing, and stablecoin systems like Aave, MakerDAO, and Liquity.