> Let's imagine a DeFi lending protocol. If i supply the protocol with 100$ worth of ETH (collateral) and get 50$ of (token), how overcollateralized is this? To determine how overcollateralized your position is in this DeFi lending protocol scenario, we need to calculate the collateralization ratio. The collateralization ratio is the value of the collateral (ETH) divided by the value of the borrowed asset (token), expressed as a percentage. Here’s the breakdown: - You supply $100 worth of ETH as collateral. - You borrow $50 worth of a token. Collateralization ratio = (Value of collateral / Value of borrowed asset) × 100 = ($100 / $50) × 100 = 200% This means your position is 200% collateralized. In other words, the value of your collateral is twice the value of the borrowed token. In DeFi, this is often referred to as being "overcollateralized" because the collateral exceeds the borrowed amount (anything above 100% is overcollateralized). Specifically, your position is overcollateralized by 100% of the borrowed value, or a 2:1 ratio. This is a common requirement in DeFi lending protocols to protect against volatility and ensure the system remains solvent if the collateral’s value drops.