What Role Does the Liquidation Ratio Play in CDP-based Stablecoins?
The liquidation ratio is the minimum required ratio of collateral value to debt value. It dictates the point at which a user's collateral will be automatically sold to cover their stablecoin debt.
Setting a higher ratio provides a larger safety buffer for the protocol against rapid price drops. It is a critical risk management parameter, ensuring the protocol remains solvent and the stablecoin's peg is protected.
Glossar
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.
Liquidation Ratio
Trigger ⎊ Liquidation ratio, within cryptocurrency derivatives, represents the percentage distance the mark price must move against a position before forced liquidation commences, directly impacting risk exposure.
Collateral Value
Valuation ⎊ Determining the worth of assets pledged to secure a loan or a leveraged position is a continuous and dynamic process.
Cdp
Framework ⎊ Collateralized Debt Positions (CDPs) represent a core mechanism within decentralized finance (DeFi), specifically serving as the foundation for over-collateralized lending protocols.