🚩Understanding Liquidation and Overcollateralization

Loans require overcollateralization for security, which is calculated as follows:

  • Overcollateralization Ratio: Overcollateralization Ratio=Collateral ValueLoan AmountOvercollateralization Ratio=Loan AmountCollateral Value​

  • Liquidation: If the collateral value falls and the overcollateralization ratio dips below a set threshold (e.g., 110% for liquidation), the collateral might be liquidated.

  • Example: If your $10,000 ETH collateral drops to $6,600, the ratio becomes: Overcollateralization Ratio=6,6006,000=1.1 or 110%Overcollateralization Ratio=6,0006,600​=1.1 or 110% Falling below this ratio triggers liquidation.

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