What Is Overcollateralization?
Providing more collateral than the value of the loan or position to protect against price volatility.
Definition
Overcollateralization is a risk management practice where borrowers deposit collateral worth more than their loan amount. Common ratios range from 110% to 200%+. This buffer protects lenders if collateral value drops, ensuring loans remain backed even during volatility.
How It Works
If a protocol requires 150% collateralization, borrowing $100 requires $150 in collateral. If collateral drops below the threshold (e.g., 120%), liquidation occurs. Higher overcollateralization = more safety buffer but lower capital efficiency.
In Continuum
Continuum minting is always 100% collateralized (not overcollateralized) - your stablecoins back L/S tokens at full value. However, when using L tokens as collateral on lending protocols like Kamino or Marginfi, those protocols may require overcollateralization (e.g., 130-150%). This is where you need to monitor health factors.
Related Terms
Assets deposited to back or secure a financial position.
Forced closure of a position when collateral value falls below required levels.
A metric indicating how close a leveraged position is to liquidation.
Using borrowed capital to amplify the potential returns (and risks) of a position.
More Trading Terms
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