Collateralization Ratio

Collateralization Ratio: The Backbone of TheStandard's Stability

What is the Collateralization Ratio?

The collateralization ratio is a fundamental concept in decentralized finance (DeFi) that ensures the stability and security of borrowed assets. In simple terms, it's the ratio of the value of collateral deposited to the value of assets borrowed.

In TheStandard protocol, we maintain a single, straightforward collateralization ratio:

110% for 0% interest borrowing

This means that for every 100 units of stablecoin borrowed, users must deposit at least 110 units worth of collateral.

Why is the Collateralization Ratio Important?

1. Security: It ensures that borrowed assets are always backed by more value than what's been lent out.

2. Stability: It helps maintain the peg of our stablecoin by ensuring there's always enough collateral to back it.

3. Trust: Users can verify the collateralization on-chain, providing transparency and confidence in the system.

TheStandard vs. Traditional Banking

Here's where TheStandard truly shines:

• Traditional Banking: The legacy central banking system is primarily backed by confidence. There's no mathematical proof or guarantee that your deposits are fully backed.

• TheStandard Protocol: We ensure that there is always mathematically provable collateral of at least 110% backing all stablecoins in circulation. This isn't just a promise – it's verifiable on the blockchain.

The Reality of Overcollateralization

While our minimum collateralization ratio is 110%, the actual average ratio in the system is typically much higher:

Current Average Collateralization: Approximately 300%

This high level of overcollateralization occurs because:

1. Users are cautious and prefer to maintain a safety buffer above the minimum ratio.

2. It provides protection against market volatility.

3. Higher collateralization can offer users more borrowing flexibility.

This means that in reality, for every 100 units of stablecoin in circulation, there's often around 300 units worth of collateral backing it. This extra layer of security further strengthens the stability and reliability of TheStandard protocol.

Conclusion

TheStandard's 110% collateralization ratio for 0% interest borrowing offers a unique blend of security and opportunity. By ensuring that all borrowed assets are always overcollateralized and verifiable on-chain, we provide a level of transparency and stability that traditional financial systems simply can't match.

The fact that users typically maintain even higher collateralization ratios demonstrates the community's commitment to the protocol's health and stability. This collective behavior further reinforces the robustness of TheStandard ecosystem, making it a secure and attractive platform for DeFi participants.