Explain the Concept of the “Liquidation Ratio” in DeFi Lending

The liquidation ratio, or liquidation threshold, is the collateral-to-debt ratio at which a borrower's collateral becomes eligible for liquidation. It is typically set above 100 percent to provide a safety buffer.

If the value of the collateral drops and the ratio falls to this threshold, the smart contract allows liquidators to seize and sell the collateral to repay the loan.