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Collateral Requirement

Over-collateralization is one of the basics powering the value of the H2O. The vaults facilitate the generation of H2O against locked up Collateral and are required to be overcollateralized and have a Minimum Collateral Ratio that users need to uphold to avoid the Liquidation of their positions.

What is the Collateral Ratio (Coll. Ratio)?

The Collateral Ratio is the ratio between the value of the collateral and the value of the generated H2O on a given Vault. For example: Let's say the LP tokens locked in a user’s Vault is worth $300, and 100 units of H2O is generated. This means the Collateral Ratio is 300% (300/100). For each 1 H2O, there is $3 worth of collateral value backing it. In the Defrost Protocol, your vault may be liquidated if it falls below the Minimum Collateral Ratio.
The Liquidation Ratio varies by vault type. A high collateral ratio in a vault means low leverage and low liquidation risk. Riskier collateral is likely to have a higher Minimum Collateral Ratio.
Minimum Collateral Ratio (Min Coll. Ratio)
This controls the cap of H2O to be borrowed based on the value of each type of LP token.
Users could deposit/withdraw LP tokens, or borrow/repay H2O when the collateral ratio is above the needed minimum. At the same time, the real-time collateral ratio will be changed. When the collateral ratio is at or below the minimum, the liquidation will be open to a third party.

The maximum amount of H2O to be minted

The maximum amount of H2O that can be minted depends on the formula below:
Max Amount of H2O minted=Value of the collateral/Min Coll.RatioMax \ Amount \ of \ H2O \ minted = Value \ of \ the \ collateral / Min \ Coll.Ratio
Vault statuses depend on the price fed by oracle contracts which in turn is provided by specialized third-party protocols such as Chainlink.