What Happens If the Collateralization Ratio Falls below a Minimum Threshold?
If the ratio drops below the minimum threshold (e.g. 150% to 149%), the position becomes vulnerable to liquidation.
The smart contract marks the position for liquidation, allowing anyone to purchase the collateral at a discount to repay the outstanding stablecoin debt. This action closes the under-collateralized position, ensuring the stablecoin remains fully backed.
Glossar
Minimum Threshold
Threshold ⎊ The minimum threshold, across cryptocurrency derivatives, options trading, and broader financial derivatives, represents a pre-defined level that must be breached for a specific action or condition to be triggered.
Collateralization Ratio
MarginRequirement ⎊ The Collateralization Ratio quantifies the amount of posted margin relative to the notional value or exposure of a leveraged position, serving as the primary metric for assessing margin adequacy.