What is Collateralisation Ratio

The collateralisation ratio (CR) is the percentage relationship between the value of collateral deposited and the value of the loan borrowed in a DeFi lending protocol — the fundamental measure of how well-secured a DeFi loan is. Maintaining adequate collateralisation is the primary safety mechanism preventing liquidation. COLLATERALISATION RATIO FORMULA Collateralisation Ratio = (Collateral Value / Debt Value) × 100% Example: You deposit 1 ETH ($3,000) as collateral and borrow $1,500 USDC. CR = ($3,000 / $1,500) × 100% = 200%. WHY HIGH COLLATERALISATION IS REQUIRED DeFi loans are overcollateralised (you deposit more than you borrow) because: There is no identity-based credit scoring. Smart contracts cannot sue defaulting borrowers. Collateral must be sufficient to cover the loan even after a rapid price decline. A 150% minimum CR means if ETH falls 33%, the collateral is still worth 100% of the loan. KEY COLLATERALISATION LEVELS Maximum LTV (Loan-to-Value): The maximum you can borrow relative to collateral. Aave's ETH max LTV is typically 80% (125% minimum CR). Liquidation Threshold: The CR below which liquidation is triggered — always higher than the max borrow limit to provide buffer. Aave ETH liquidation threshold: ~82.5% LTV (121% CR). Health Factor: Aave expresses CR as a Health Factor: HF = Liquidation Threshold / Current LTV. HF > 1 = safe. HF < 1 = liquidated. Safe Margin: Experienced DeFi users target 200-300% CR (50-67% LTV) to maintain safety buffer during volatility. MAINTAINING SAFE COLLATERALISATION Monitor your position during volatile markets — ETH dropping 20% in a day can push borderline positions toward liquidation. Set price alerts at levels that would reduce your CR to 150% — giving time to add collateral or repay debt. During high volatility periods (crypto market stress), proactively add collateral or reduce debt. Never borrow close to the maximum LTV unless you can monitor your position continuously.

Terms in addition to the Collateralisation Ratio

Blockchain

A blockchain is a subset of a distributed database. The Bitcoin inventors originally prototyped the system in 2008. This modern database is made up of separate blocks that are connected together in a chronological chain. Blockchains may be used to store a wide range of data types. It has mostly been utilized as a public ledger for bitcoin transactions to date. A peer-to-peer network comprised of independent nodes uses a consensus process to ensure the blockchain's security and legitimacy. Each node in the network keeps a public and immutable copy of the data.

2 Factor Authentication (2FA)

2 Factor Authentication is a security measure with two layers. It is used by the majority of cryptocurrency exchanges. To log in, you must provide not only a password, but also a code obtained, for example, from the Google authenticator.

Airdrop

An airdrop is a method of distributing coins. End users can typically obtain coins for free or in exchange for doing a small task, such as subscribing to a newsletter, sending a tweet, or inviting others via a personal affiliate link. Cryptocurrency airdrops — the act of depositing cryptocurrency into public crypto wallets — are utilized as a marketing, liquidity creation, and network bootstrapping technique for many different types of blockchain initiatives.

Altcoin

Altcoin - "alternative coin" - is any kind of digital currency other than Bitcoin. Since the launch of Bitcoin, the world's first digital currency, many altcoins (as well as supporting blockchains) have been created. Altcoin digital currencies share many similarities to Bitcoin, but consistently and have significant differences. There are about 20,000 altcoins, and this number is expected to grow significantly in the coming years. Altcoins often develop Bitcoin features. Ethereum, currently the most widely used blockchain, supports digital contracts and separate applications where Bitcoin does not. Altcoins are also often created to cater to the needs of different users. The Litecoin blockchain, for example, can process payments quarterly for the duration of Bitcoin.

Cold Storage

Cold storage is the way to store cryptocurrency offline. The word refers to the use of offline wallets that are not connected to the internet. Cold storage is the most secure way to keep cryptocurrencies since an offline currency becomes less likely to be hacked and stolen. Paper wallets, printed renditions of private keys, and offline hardware and software wallets are all examples of cold storage.