Collateral Ratio

The collateral ratio is the value of a borrower's locked collateral divided by the value of their outstanding debt, usually expressed as a percentage. It is the key solvency metric for any collateralized loan in DeFi: a ratio of 200 percent means the collateral is worth twice the debt, while a ratio approaching the protocol's minimum means liquidation is near.

A concrete example: a user locks ETH worth 15,000 dollars and borrows 5,000 DAI, giving a collateral ratio of 300 percent. If ETH's price falls until the collateral is worth only 7,500 dollars, the ratio has dropped to 150 percent. If the protocol's liquidation threshold for that asset is 150 percent, the position is now eligible for liquidation — liquidators repay some of the debt and claim collateral at a discount until the ratio is restored or the position is closed.

Each protocol sets minimum ratios per asset based on volatility and liquidity: stablecoin collateral allows ratios close to 100 percent, while volatile tokens require much larger buffers. A common misconception is that staying just above the minimum is fine — in practice, crypto prices can gap downward in minutes, so experienced borrowers maintain wide margins and add collateral or repay debt well before the threshold. Managing the ratio actively is the core discipline of borrowing in DeFi.