Collateral Ratio

The collateral ratio refers to the amount of collateral required relative to the amount of the minted asset - ONEZ. A collateral ratio of 150% means that the value of the collateral must be 150% of the value of the loan or minted asset. This extra collateral is a safety measure, ensuring that there is sufficient value to cover the loan in case of a decrease in the collateral's value.

Minimum: 110%

Recommended: 150%

Critical: 105%

It is mandatory to keep a collateral ratio of 150% to mint ONEZ

When the collateral ratio changes, it affects how much ONEZ you can mint against your deposited collateral. Higher collateral ratios require more collateral for the same amount of minted assets, providing a larger safety buffer for the platform but reducing the efficiency of your capital.

Ideal Collateral Ratio

The "ideal" collateral ratio depends on several factors, including:

  • Risk Tolerance: Higher ratios mean less risk of liquidation during market downturns but also mean less efficient use of your capital.

  • Market Volatility: A higher collateral ratio can provide more security against price swings in highly volatile markets.

  • Liquidity Needs: If you need more liquidity, a lower ratio allows you to mint more against your collateral, but with increased risk.

Example with 0.5 ETH and a 150% Collateral Ratio

Let's assume:

  • 1 ETH is worth $2,000.

  • The collateral ratio required by ONEZ is 150%.

Step 1: Calculate the Value of Deposited Collateral

  • You deposit 0.5 ETH as collateral.

  • Value of 0.5 ETH = 0.5 * $2,000 = $1,000.

Step 2: Calculate How Much ONEZ Can Be Minted

  • With a 150% collateral ratio, the formula to calculate the maximum loan (or mintable ONEZ) value is: ValueofCollateral/CollateralRatioValue of Collateral/Collateral Ratio.

  • Here, Collateral Ratio = 150% = 1.5 (as a decimal).

  • Maximum mintable ONEZ value = $1,000 / 1.5 = $666.67.

Therefore, with 0.5 ETH deposited as collateral (assuming ETH is valued at $2,000), you could mint approximately $666.67 worth of ONEZ, maintaining the required 150% collateral ratio. This ensures that the deposited collateral exceeds the value of minted ONEZ by 50%, safeguarding against volatility and potential losses.

At 170% Collateral Ratio

  • Value of 0.5 ETH = 0.5 * $2,000 = $1,000.

  • Collateral Ratio = 170% = 1.7 (as a decimal).

  • Maximum mintable ONEZ value = $1,000 / 1.7 ≈ $588.24.

At 200% Collateral Ratio

  • Value of 0.5 ETH = $1,000 (as before).

  • Collateral Ratio = 200% = 2.0 (as a decimal).

  • Maximum mintable ONEZ value = $1,000 / 2 = $500.

What Happens as the Collateral Ratio Increases

  • 170% Ratio: You need to provide significantly more collateral for the same amount of ONEZ compared to a 150% ratio, reducing the amount you can mint to around $588.24.

  • 200% Ratio: The amount of ONEZ you can mint decreases further to $500, as you're now required to have twice the value of the minted ONEZ in collateral.

Generally, maintaining a collateral ratio slightly above the minimum requirement can be a good practice, as it provides a buffer against market volatility and potential price drops of the collateral. However, excessively high ratios may not be economically efficient, as they lock up more capital than necessary.

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