> For the complete documentation index, see [llms.txt](https://strobe-protocol.gitbook.io/strobe-protocol/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://strobe-protocol.gitbook.io/strobe-protocol/money-market/overcollateralization-and-collateralization-ratio.md).

# Overcollateralization and collateralization ratio

{% hint style="danger" %}
All asset parameters including LTV ratio and liquidation threshold are **example values** to facilitate example calculations. If you need to look at actual values used on Strobe Protocol, please have a look at [Values](/strobe-protocol/money-market/asset-parameters/values.md)  page under [Asset parameters](/strobe-protocol/money-market/asset-parameters.md) section.
{% endhint %}

## Overcollateralization and collateralization ratio

In money markets, all positions need to stay overcollateralized. What this means is that users can deposit and borrow, but they must have more value in collateral assets deposited than debt in USD at all times.

Liquidation refers to the action of repaying another user's debt position and taking away a certain amount of collateral in return if their health factor drops below 1, within liquidation range.

Liquidation threshold provides a buffer for price fluctuations in case of liquidation to protect borrowers from sharp price fluctuations and potential liquidations. When a user is withdrawing or borrowing, the protocol uses the LTV ratio as well as liquidation threshold to check if the user is still overcollateralized after withdrawal or borrowing. Namely, it's called 'collateralization ratio':

$$
\text{Collateralization ratio} = \frac{\sum (\text{LTV ratio}\_i \times \text{Collateral Value in USD}\_i)}{\sum (\frac{\text{Borrowing Value in USD}\_i}{\text{Liquidation threshold}\_i })}
$$

where $$0 \leq \text{LTV ratio} \leq 1$$ and $$0 \leq \text{Liquidation threshold} \leq 1$$.

For example, given the following table:

<table><thead><tr><th>Parameter</th><th width="218">Asset 1</th><th>Asset 2</th></tr></thead><tbody><tr><td>LTV ratio</td><td>90%</td><td>90%</td></tr><tr><td>Liquidation threshold</td><td>70%</td><td>100%</td></tr><tr><td>Price</td><td>5 USD</td><td>1 USD</td></tr><tr><td>Deposited amount</td><td>5 USD</td><td>1 USD</td></tr><tr><td>Borrowed amount</td><td>2 USD</td><td>0.3 USD</td></tr></tbody></table>

The collateralization ratio would be:

$$
\text{Collateralization ratio} = \frac{(0.9 \times 5) + (0.9 \times 1)}{\frac{2}{0.7} + \frac{0.3}{1.0}} = \frac{(4.5) + (0.9)}{\frac{2}{0.7} + 0.3} \newline = \frac{5.4}{2.857 + 0.3} = \frac{5.4}{3.157} = 1.71... > 1
$$

In this case, the collateralization ratio is bigger than 1, so this can be the state of the user after they have successfully withdrawn or borrowed some amount from a fully functional protocol. The user needs to keep the collateralization ratio above 1.