Margin Ratio

The margin ratio is calculated as (Total Collateral Value / Total Borrowed Value). It quantifies the health of a leveraged position. A lower ratio indicates higher risk, as the collateral provides less coverage for the loan. Protocols set a minimum maintenance margin ratio; falling below this threshold triggers liquidation to repay the debt.

This is the critical margin ratio level, often called the liquidation threshold or maintenance margin. If a user's ratio falls to or below this value, their position becomes eligible for liquidation. For example, a protocol with a 150% maintenance margin will liquidate positions when Collateral / Debt ≤ 1.5. This protects the protocol from undercollateralized loans.

• Initial Margin Ratio: The minimum ratio required to open a new leveraged position (e.g., 200%). It ensures a safety buffer from day one.
• Maintenance Margin Ratio: The minimum ratio required to keep a position open (e.g., 150%). It's the line that triggers liquidation. The difference between these two values creates a margin buffer or safety zone for the user.

The margin ratio is not static; it fluctuates with market prices. It is calculated using real-time oracle prices for both collateral and borrowed assets. A drop in collateral value (e.g., ETH price falls) or a rise in debt value increases the ratio, pushing the position closer to liquidation. This creates price oracle risk as a critical dependency.

The margin ratio is inversely related to the Loan-to-Value (LTV) ratio. A maximum LTV of 75% implies a minimum initial margin ratio of approximately 133% (1 / 0.75). The margin ratio directly shows how much "borrowing headroom" remains. A ratio of 250% means the debt uses only 40% of the available collateral (1 / 2.5).

Implementation details vary:

• Compound Finance: Uses Collateral Factor (max LTV) and a Liquidation Threshold slightly below it.
• Aave: Features distinct Loan-to-Value, Liquidation Threshold, and Liquidation Bonus parameters.
• Perpetual Futures DEXs: Use margin ratios to manage leverage, often allowing much higher ratios (e.g., 10x leverage = ~110% maintenance margin).

The minimum collateral ratio required to open a leveraged position or borrow funds. It is a preventative risk parameter set by the protocol.

• Purpose: Ensures a user starts with sufficient skin in the game to absorb initial price volatility.
• Example: An Initial Margin Ratio of 125% means you must deposit $125 in collateral to open a $100 position.

The minimum collateral ratio a position must maintain after opening. Falling below this level triggers a margin call.

• Purpose: Acts as a safety buffer, signaling that a position is at high risk of liquidation.
• Protocol Action: Users are typically notified and given a grace period to add more collateral before automatic liquidation begins.

The specific threshold where a position becomes under-collateralized and is automatically liquidated by the protocol's keepers or liquidation engine.

• Mechanism: When the margin ratio hits this level, the position is closed, and collateral is sold to repay the debt.
• Consequence: The user loses their remaining collateral, minus a liquidation penalty paid to the liquidator.

A related risk metric used in money market protocols like Aave and Compound, representing the inverse of the Margin Ratio.

• Calculation: Health Factor = (Collateral Value * Liquidation Threshold) / Borrowed Value.
• Critical Level: A Health Factor ≤ 1.0 means the position can be liquidated. Users monitor this to stay above the danger zone.

These ratios directly determine the liquidation price for a leveraged position. It's the asset price at which the margin ratio falls to the liquidation threshold.

• Formula Influence: Liquidation Price = Entry Price * (1 - (1 / Maintenance Margin Ratio)) for a long position.
• User Calculation: Traders must calculate this price to set appropriate stop-losses and manage risk.

Setting these levels is a core function of protocol governance and risk teams. They balance user leverage with systemic safety.

• Variables: Ratios are often adjusted based on asset volatility and market conditions.
• Goal: To minimize bad debt for the protocol while allowing efficient capital use. Incorrect settings can lead to cascading liquidations or capital inefficiency.

The Margin Ratio is the ratio of a user's total collateral value to their total borrowed value, expressed as a percentage. It is the inverse of the more common Loan-to-Value (LTV) ratio. A higher margin ratio indicates a larger safety buffer, while a ratio approaching the Liquidation Threshold signals imminent risk.

It is calculated as: Margin Ratio = (Total Collateral Value / Total Borrowed Value) * 100%

Example: If you deposit $10,000 of ETH as collateral and borrow $4,000 of USDC, your margin ratio is 250% ($10,000 / $4,000 * 100%).

This is the minimum permissible margin ratio set by the protocol. If a user's margin ratio falls below this threshold due to collateral depreciation or debt appreciation, their position becomes eligible for liquidation. This mechanism protects lenders from under-collateralized loans.

• Initial Margin: The minimum margin ratio required to open a new leveraged position.
• Maintenance Margin: The minimum margin ratio required to keep a position open (synonymous with the Liquidation Threshold). The difference between the two creates a margin buffer or safety zone.

For protocols and users, the margin ratio is a primary risk dashboard metric. Protocols use it to trigger automated liquidations. Users monitor it to:

• Add more collateral
• Repay debt
• Close positions ...to avoid liquidation penalties.

In protocols like Aave and Compound, the Health Factor serves a similar purpose. It is calculated as (Collateral * Liquidation Threshold) / Debt. A Health Factor below 1.0 triggers liquidation. While related, it is a different formula from the classic margin ratio.

The collateral value ratio at which a position becomes eligible for liquidation. This is the critical line that defines an unsafe margin ratio. If the margin ratio falls below the inverse of the liquidation threshold (e.g., a 80% threshold means liquidation at a 125% margin ratio), keepers can liquidate the position to repay the debt.

A risk metric used by protocols like Aave and Compound, inversely related to the margin ratio. It is calculated as (Collateral Value * Liquidation Threshold) / Total Borrowed. A Health Factor below 1.0 indicates an undercollateralized position at risk of liquidation. While Margin Ratio = Collateral / Debt, Health Factor incorporates the liquidation threshold.

The foundational principle requiring borrowed value to be less than posted collateral value, resulting in a margin ratio > 100%. This is a security mechanism in decentralized finance (DeFi) to mitigate counterparty risk and price volatility, contrasting with undercollateralized or uncollateralized lending in traditional finance.

A fee charged to a borrower when their position is liquidated due to a breached margin ratio. This penalty, often a percentage of the liquidated amount (e.g., 5-15%), is paid to the liquidator as an incentive and to cover execution risk. It makes maintaining a safe margin ratio critical to avoid this loss.