How Can Dynamic Collateralization Ratios Improve Capital Efficiency?
Dynamic collateralization ratios improve capital efficiency by allowing the system to adjust the required collateral level based on the current market risk and volatility of the underlying asset. During periods of low volatility, the ratio can be lowered (e.g. from 150% to 130%), allowing users to mint more stablecoin with the same amount of collateral.
Conversely, the ratio is raised during high volatility. This allows for a higher stablecoin supply to be generated when the market is calm, optimizing capital use while maintaining security.
Glossar
Optimizing Capital Use
Allocation ⎊ Optimizing capital use within cryptocurrency, options, and derivatives necessitates a dynamic allocation strategy, shifting resources to opportunities exhibiting the highest risk-adjusted returns relative to capital constraints.
Dynamic Collateralization Ratios
Adjustment ⎊ Dynamic Collateralization Ratios represent a risk management mechanism where the minimum required collateral value for a loan or derivatives position is automatically adjusted based on real-time market parameters.
Collateralization Ratios
Coverage ⎊ Collateralization ratios, within cryptocurrency derivatives, options trading, and broader financial derivatives, represent a crucial risk management metric quantifying the extent to which an asset's value exceeds the outstanding obligations secured by it.