Collateral ratio in DeFi: what it is and why it matters
A DeFi collateral ratio is your collateral value divided by debt as a percentage. A minimum ratio set by the protocol can trigger liquidation.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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The number moves with the collateral price and loan size. A protocol usually does not check your credit history. It relies on the crypto in a smart contract.
What is a collateral ratio in DeFi?
In a DAI loan, the ratio is the dollar value of the collateral divided by the DAI borrowed. The result is a percentage. That cushion lets you borrow stablecoins against crypto without selling it. The loan is overcollateralized.
How does the ratio trigger liquidation?
Each loan type has a minimum collateralization ratio, a floor set by the protocol. If the ratio falls below it, anyone may call a contract function to sell part of the collateral for DAI. The DAI raised pays the debt and rewards the caller. A health factor shows how close the loan is to that floor.
What makes required ratios different?
The floor depends on the collateral, protocol rules and market conditions. A protocol can change a floor when markets get volatile.
- A jumpy token usually needs a bigger cushion than a stable one.
- A lower minimum ratio generally comes with a higher interest rate.
- MakerDAO became Sky in August 2024 and sets minimums per collateral type.
How is DeFi collateral different from a bank?
A bank loan usually depends on your credit history and income. A DeFi overcollateralized loan usually does not. You send crypto to a smart contract, and the code holds it.
Frequently asked questions
An LTV divides the loan by the collateral value, so it is the inverse. Check which figure your app shows.
Yes. More collateral raises the ratio, and repaying part of the debt raises it too. Do it while the ratio is above the minimum.
Protocols use price oracles to value collateral. A new price can trigger a recalculation and a fall can push your ratio below the minimum.
