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How Do Lending Protocols Specifically Use Oracles to Calculate Collateralization Ratios?

Collateral Value $/$ Loan Value $=$ Ratio $Rightarrow$ Liquidation Trigger (Risk Management Metric)
Greeks.Live20.11.25

How Do Lending Protocols Specifically Use Oracles to Calculate Collateralization Ratios?

Lending protocols use oracles to obtain the real-time market value of both the collateral asset and the borrowed asset. The collateralization ratio is calculated as (Value of Collateral / Value of Loan).

The oracle's price is critical because if the collateral's value drops below a certain threshold (the liquidation ratio), the protocol's smart contract automatically allows for the collateral to be liquidated to repay the loan.

What Is the Significance of the Collateralization Ratio in a CDP?
What Is the Significance of the Loan-to-Value (LTV) Ratio in a Smart Contract Loan?
What Is ‘Over-Collateralization’ and Why Is It Common in Immutable DeFi Lending?
How Does Adding Liquidity to a Pool Affect Its Resistance to Price Manipulation?

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