How it works
The extra value gives a protocol room to liquidate collateral if prices move adversely. Required ratios vary by asset and protocol.
What to check
Check the initial and liquidation collateral ratios, oracle source and liquidation penalty. Volatile collateral generally needs a larger buffer.
- Know liquidation threshold
- Track collateral volatility
- Understand liquidation penalty
Limits and risks
A position can become liquidatable quickly during sharp market moves. Adding more collateral reduces liquidation risk but increases the capital exposed to the protocol.
Primary sources
Bitcoin Developer Reference↗Ethereum developer documentation↗FATF: Virtual Assets↗General information only. Investment products can lose value, and terms, fees and regulation can change.