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.