Collateral Margin, also known as the Loan-to-Value (LTV) ratio, is a crucial concept in decentralized finance (DeFi) that measures the ratio of a user’s borrowed funds to the value of their deposited collateral. It represents the percentage of collateral that is being used to secure a loan.

Imagine you’re borrowing money from a DeFi protocol using your cryptocurrency assets as collateral. The Collateral Margin serves as a safety net to protect both the lender and the borrower.

A higher Collateral Margin indicates lower risk for the lender, while a lower Collateral Margin means the borrower has more room for price fluctuations before facing liquidation.

The Collateral Margin is calculated by dividing the borrowed amount by the value of the deposited collateral. For instance, if you borrow $100 worth of cryptocurrency against $150 worth of collateral, your Collateral Margin would be 66%.

DeFi protocols typically set a minimum Collateral Margin requirement to ensure that borrowers have sufficient collateral to cover their loans. This requirement can vary depending on the protocol and the type of collateral used.

Understanding Collateral Margin is essential for web3 beginners to navigate DeFi borrowing responsibly. It helps borrowers determine their maximum borrowing capacity and assess the risk of liquidation if the value of their collateral drops.