What Is the Concept of “Collateralization Ratio” in Decentralized Derivatives?
The collateralization ratio is the value of the collateral backing a derivative position (or synthetic asset) divided by the value of the debt or liability. In decentralized protocols, this ratio is often set above 100% (over-collateralized) to provide a safety buffer against price volatility.
If the ratio falls below a maintenance level, the position is subject to liquidation to protect the protocol's solvency.
Glossar
Tokenized Assets
Asset ⎊ Tokenized assets represent the fractionalization and digitization of ownership rights in underlying assets ⎊ ranging from real estate and commodities to financial instruments like options and derivatives ⎊ using blockchain technology.
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.
Safety Buffer
Mitigation ⎊ A safety buffer in cryptocurrency derivatives represents a capital reserve strategically allocated to absorb potential adverse price movements or counterparty risk, functioning as a crucial component of risk management protocols.