How Is Collateral Managed and Liquidated in a DeFi Smart Lending Contract?

The smart contract manages collateral by locking the borrower's assets in a non-custodial escrow on the blockchain. The contract constantly monitors the collateral ratio against the loan value.

If the ratio drops below a predefined liquidation threshold due to market price changes, the contract automatically triggers liquidation. This process typically involves selling the collateral on the open market to repay the loan and cover fees, all without human intervention.