In Options, How Does a Tokenized Asset's Volatility Affect the Liquidation Threshold? ⎊ Path

In Options, How Does a Tokenized Asset’s Volatility Affect the Liquidation Threshold?

A tokenized asset's volatility significantly impacts the liquidation threshold for a loan or margin position. Higher volatility necessitates a lower liquidation threshold (meaning a higher required collateralization ratio) to provide a larger buffer against sudden, sharp price drops.

This is done to protect the protocol's solvency from a rapid, unrecoverable loss.

How Does Over-Collateralization Mitigate Systemic Risk in DeFi?

How Does the Choice of Collateral (E.g. ETH Vs. a Basket of Tokens) Affect the Over-Collateralization Ratio?

Why Is the Maintenance Margin Typically Lower than the Initial Margin?

What Is ‘Over-Collateralization’ and Why Is It Common in Immutable DeFi Lending?

How Does a Decentralized Stablecoin’s Collateral Ratio Impact Its Stability?

How Does a Higher Volatility Asset Affect the Required Maintenance Margin Percentage?

How Do Decentralized Finance (DeFi) Protocols Use Over-Collateralization to Manage Risk in Derivatives?

What Is the Role of Collateral Haircut in Managing Margin Call Risk?

Glossar

Threshold

Barrier ⎊ A threshold, within cryptocurrency derivatives and options trading, fundamentally represents a price level that must be breached for a contract to become active or trigger a specific outcome.

Lower Liquidation Threshold

Barrier ⎊ This parameter defines the specific level of account equity, expressed as a percentage of the position's notional value or as an absolute value, below which an automatic liquidation process is initiated for a derivative position.