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Collateral ratio shows how much collateral should a borrower use to borrow. All loans are over-collateralized. If collateral ratio will his the liquidation threshold, then the loan is liquidated.
- wETH, wBTC, and ETH
- ERC20 tokens
- Partners ERC20 tokens
- Our own SMARTCREDIT token
The collateral ratio for a specific loan depends on:
- The loan term—the longer the loan term, the higher the collateral ratio
- Trust score—the better the trust score, the better the collateral ratio for the borrower
- The collateral asset—assets with higher volatility have higher collateral ratios and vice versa
Why is the collateral ratio depending on the loan term? It's because:
- If one borrows for a longer-term, one needs more collateral because the asset price swings grow with the price.
- If one borrows for a shorter term, one needs less collateral.
SmartCredit.io calculates the collateral ratio based on the liquidation probabilities. The system proposes the collateral ratio, which results in the 5% liquidation probability for the collateral asset on the given loan term.
The borrower can still increase the collateral ratio if he wishes to have a lower probability of getting liquidated. The borrower can add collateral to the running loans during the loan term too.
The borrower can subscribe to the Positions Monitoring System and receive notifications when the risk of liquidations increases. These notifications are sent when the probability of liquidation grows to 15%. The borrower can then either ignore this notification, she can add more collateral, or can pay back parts of the loan.