What is collateralization ratio?

The value of collateral you have posted divided by the value of what you have borrowed, expressed as a percentage.

Lending protocols require it to stay above a published minimum, and the further above that minimum it sits, the more the market can move before you are liquidated. Because both sides are marked to live prices, the ratio falls when your collateral drops or when the asset you borrowed rises, and both can happen at once.

The mistake that costs people money is treating the minimum as a target. Borrowers who open at the minimum to maximize borrowing power are the first liquidated in any sharp move, often within minutes.

How it works

The ratio is collateral value divided by debt value, times 100. A 200 percent ratio means you have posted twice as much as you owe.

Each protocol sets a required minimum per collateral type, published in its own parameters, and volatile assets carry stricter requirements than stablecoins. Falling below the minimum makes the position liquidatable, at which point a liquidator repays part of your debt, takes collateral, and keeps a bonus paid out of your position.

Two ways to read the same position:

Illustrative; protocols use one convention or the other and the two are inverses.

The ratio moves on its own even when you do nothing, because prices move. Borrowing a volatile asset against volatile collateral means both legs can work against you simultaneously, which is why borrowing a stablecoin against a volatile asset is the more common structure.

Interest accrues to the debt side, so a position left untouched drifts downward in ratio over time even in a flat market.

Example

Illustrative. You post 10,000 dollars of ETH and borrow 4,000 dollars of a stablecoin. The ratio is 250 percent. The protocol's minimum for ETH collateral is 150 percent, meaning liquidation when collateral falls to 6,000 dollars, which is a 40 percent price fall. Had you borrowed 6,000 dollars instead, the ratio would be 167 percent and liquidation would arrive at 9,000 dollars of collateral, a fall of only 10 percent. The extra 2,000 dollars borrowed cut your tolerance for a price move from 40 percent to 10 percent.

Why it matters when you buy

Borrowing against crypto you already hold is a way to avoid a disposal and the tax event that comes with it, and it introduces liquidation risk in exchange. If you are considering it, the volatility of the collateral is what sets a survivable ratio, and a disposal by liquidation is still a taxable event in most systems. The tax pages cover disposal treatment by jurisdiction.

Related terms

liquidation threshold — the ratio at which liquidation triggers; liquidation — what happens when you breach it; over collateralization — why the ratio exceeds 100 percent; defi — where these positions live; oracle — what supplies the prices.

Questions

What ratio is safe?

There is no protocol-defined safe level above the minimum, only more or less room for a price move. The useful question is how far your collateral can fall before liquidation, which you can compute directly from the ratio and the minimum.

Does interest change my ratio?

Yes. Accrued interest increases the debt side, so a position you never touch slowly moves toward its liquidation threshold even if prices do not move at all.

What price is used?

The protocol's oracle price, not the price on any particular exchange. Oracle updates can lag or, in a stressed market, differ from where the asset is actually trading, which is a risk separate from the ratio itself.