What Is Collateralization Ratio?
The collateralization ratio is the value of collateral deposited relative to the value of assets borrowed. A collateralization ratio of 150% means $150 of collateral backs $100 of debt. DeFi lending protocols require over-collateralization (ratios above 100%) because on-chain lending is permissionless — there's no credit check or legal recourse for default.
How Collateralization Ratio Works
Each protocol sets minimum collateralization ratios per asset based on volatility: stablecoins might require 110%, ETH might require 150%, and volatile altcoins might require 200%+. If the ratio falls below the minimum (because collateral value drops or debt value rises), the position is automatically liquidated — a smart contract sells the collateral to repay the debt.
Why It Matters for Traders
Managing collateralization ratio is the most critical skill in DeFi borrowing. Maintaining a buffer well above the minimum (e.g., 200% when the minimum is 150%) provides protection against flash crashes. Monitoring your health factor (collateralization ratio relative to the liquidation threshold) and setting alerts for approaching danger zones prevents liquidation losses.
