collateralization ratio

The collateralization ratio is the simplest health gauge of a collateralized loan: the market value of the collateral you have locked, divided by the value of the debt you owe. If you posted 300 dollars of ETH to borrow 100 dollars of DAI, your ratio is 300%. The higher it is, the safer the loan; the closer it drifts toward the protocol's minimum, the nearer you are to being liquidated. It is the reciprocal of loan-to-value (LTV), so a 200% collateralization ratio is the same as a 50% LTV.

Every collateralized protocol sets a minimum ratio (a liquidation ratio or threshold) that must be maintained, and it is always above 100% to absorb price swings, oracle lag, and liquidation costs. MakerDAO's ETH vaults historically required around 150%, meaning you could mint at most 100 DAI against roughly 150 dollars of ETH. The buffer between your current ratio and the minimum is what protects you: a volatile asset needs a fatter buffer, which is why riskier collateral is assigned a stricter minimum ratio (a lower maximum LTV).

Because the numerator moves with the market price of the collateral while the debt stays roughly fixed, the ratio is constantly changing. A falling collateral price pushes the ratio down toward the liquidation line, so disciplined borrowers keep a comfortable margin and either add collateral or repay debt as the price drops. Protocols often distinguish a borrowing threshold (how much you may initially draw) from a liquidation threshold (how far it may deteriorate before forced closure), giving a small safety band between the two.