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

**Published:** 2025-12-05
**Author:** Greeks.live
**Categories:** Path

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## 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.

- [How Does the Leverage Ratio in Derivatives Trading Determine the Trigger Point for a Liquidation Cascade?](https://learn.greeks.live/path/how-does-the-leverage-ratio-in-derivatives-trading-determine-the-trigger-point-for-a-liquidation-cascade/)

- [What Is the Significance of the Loan-to-Value (LTV) Ratio in a Smart Contract Loan?](https://learn.greeks.live/path/what-is-the-significance-of-the-loan-to-value-ltv-ratio-in-a-smart-contract-loan/)

- [How Does an NFT-backed Loan Compare to a Traditional Margin Loan on a Security?](https://learn.greeks.live/path/how-does-an-nft-backed-loan-compare-to-a-traditional-margin-loan-on-a-security/)

- [Explain the Concept of the “Liquidation Ratio” in DeFi Lending](https://learn.greeks.live/path/explain-the-concept-of-the-liquidation-ratio-in-defi-lending/)

- [What Is a “Flash Loan” and How Is It Used in Conjunction with Oracle Manipulation?](https://learn.greeks.live/path/what-is-a-flash-loan-and-how-is-it-used-in-conjunction-with-oracle-manipulation/)

- [What Is a “Flash Loan” and How Does It Relate to Market Manipulation Risks on DEXs?](https://learn.greeks.live/path/what-is-a-flash-loan-and-how-does-it-relate-to-market-manipulation-risks-on-dexs/)

- [How Do Decentralized Lending Protocols Use Oracles for Liquidation of Collateral?](https://learn.greeks.live/path/how-do-decentralized-lending-protocols-use-oracles-for-liquidation-of-collateral/)

- [What Is the Difference between “Soft Liquidation” and “Hard Liquidation”?](https://learn.greeks.live/path/what-is-the-difference-between-soft-liquidation-and-hard-liquidation/)

## Discover More

### [How Does the Concept of "Tail Risk" Specifically Apply to Short Volatility Strategies in Crypto?](https://learn.greeks.live/path/how-does-the-concept-of-tail-risk-specifically-apply-to-short-volatility-strategies-in-crypto/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![How Does the Concept of "Tail Risk" Specifically Apply to Short Volatility Strategies in Crypto?](https://learn.greeks.live/wp-content/uploads/2025/10/Automated-Market-Maker-Liquidity-Pool-Gate-Mechanisms-Simulating-Volatility-Skew-Hedging-Strategies.webp)

Tail risk is the threat of low-probability, high-impact events (e.g. a crash) that trigger the unlimited loss potential of short vol trades.

### [Why Is "Over-Collateralization" Common in DeFi Lending and Derivatives?](https://learn.greeks.live/path/why-is-over-collateralization-common-in-defi-lending-and-derivatives/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![Why Is "Over-Collateralization" Common in DeFi Lending and Derivatives?](https://learn.greeks.live/wp-content/uploads/2025/10/Precision-Machining-of-Metallic-Substrates-Simulating-Blockchain-Settlement-Layers-for-Derivatives-Pricing.webp)

It provides a necessary buffer against crypto volatility and the lack of a legal system for debt recovery in a trustless environment.

### [How Is Implied Volatility Used to Calculate the Theoretical Value of a Crypto Option?](https://learn.greeks.live/path/how-is-implied-volatility-used-to-calculate-the-theoretical-value-of-a-crypto-option/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![How Is Implied Volatility Used to Calculate the Theoretical Value of a Crypto Option?](https://learn.greeks.live/wp-content/uploads/2025/10/Intertwined-High-Frequency-Trading-Algorithms-Visualized-Through-Lemniscate-Volatility-Surface-Projections.webp)

IV is input into the pricing model to calculate the theoretical fair value, against which market price is compared.

### [Define "Smart Contract Risk" in the Context of Lending Protocols](https://learn.greeks.live/path/define-smart-contract-risk-in-the-context-of-lending-protocols/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![Define "Smart Contract Risk" in the Context of Lending Protocols](https://learn.greeks.live/wp-content/uploads/2025/10/Exploded-View-High-Fidelity-Visualization-of-Decentralized-Finance-Protocol-Core-Mechanism-and-Volatility-Metric-Translucence.webp)

Risk of financial loss due to a bug, exploit, or flaw in the protocol's code, leading to fund loss or collapse.

### [How Does Token Dilution Specifically Impact a Decentralized Autonomous Organization (DAO)'s Governance and Treasury?](https://learn.greeks.live/path/how-does-token-dilution-specifically-impact-a-decentralized-autonomous-organization-daos-governance-and-treasury/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![How Does Token Dilution Specifically Impact a Decentralized Autonomous Organization (DAO)'s Governance and Treasury?](https://learn.greeks.live/wp-content/uploads/2025/10/Decentralized-Autonomous-Organization-Governance-Mechanism-Token-Allocation-Structure-Abstract-Visualization.webp)

Reduces existing members' voting power, centralizing governance and signaling potential capital inefficiency.

### [Why Do Some DeFi Protocols Choose to Use a DEX as an Oracle Source despite the Known Risks?](https://learn.greeks.live/path/why-do-some-defi-protocols-choose-to-use-a-dex-as-an-oracle-source-despite-the-known-risks/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![Why Do Some DeFi Protocols Choose to Use a DEX as an Oracle Source despite the Known Risks?](https://learn.greeks.live/wp-content/uploads/2025/10/Platter-Stack-Mechanism-Utilizing-Strike-Price-Lever-for-Decentralized-Finance-Settlement-Primitives.webp)

Instant, cheap, on-chain data access and sometimes the only available price source for new or low-liquidity assets.

### [How Does a Broker Calculate the Required Margin for a Futures Contract?](https://learn.greeks.live/path/how-does-a-broker-calculate-the-required-margin-for-a-futures-contract/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![How Does a Broker Calculate the Required Margin for a Futures Contract?](https://learn.greeks.live/wp-content/uploads/2025/10/Precision-Engineered-Hinge-Mechanism-Reflecting-Decentralized-Finance-Protocol-Security-Architecture.webp)

Margin is calculated as a percentage of the contract's notional value, adjusted for the asset's volatility and the chosen leverage.

### [What Is the Benefit of Using DeFi Lending over CEX Margin Lending?](https://learn.greeks.live/path/what-is-the-benefit-of-using-defi-lending-over-cex-margin-lending/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![What Is the Benefit of Using DeFi Lending over CEX Margin Lending?](https://learn.greeks.live/wp-content/uploads/2025/10/Decentralized-Exchange-Automated-Market-Maker-Mechanism-Aperture-Modulating-Volatility-Surface.webp)

Elimination of centralized counterparty risk by using immutable smart contracts, offering greater transparency, but introducing smart contract risk.

### [What Is a Collateralization Ratio and Why Is It Important in DeFi Lending?](https://learn.greeks.live/path/what-is-a-collateralization-ratio-and-why-is-it-important-in-defi-lending/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![What Is a Collateralization Ratio and Why Is It Important in DeFi Lending?](https://learn.greeks.live/wp-content/uploads/2025/10/Advanced-Optical-Module-Interface-for-Decentralized-Exchange-Algorithmic-Execution-Protocol-Verification.webp)

The ratio of collateral value to liability value; it is the key metric for triggering liquidation to protect the protocol.

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