Overcollateralization Ratio is a financial metric used primarily in lending and borrowing situations, particularly within blockchain ecosystems. It measures the amount of collateral secured against a loan.In essence, it refers to the ratio of the value of collateral to the value of the loan taken out. For example, if a borrower puts up $150 worth of cryptocurrency as collateral for a $100 loan, the overcollateralization ratio is 1.5:1. This means the borrower has provided 150% of the loan amount in collateral.This practice helps mitigate risk for lenders, ensuring that even in cases of market volatility, the collateral can cover the loan if the borrower defaults. High overcollateralization ratios are common in decentralized finance (DeFi) platforms, helping maintain liquidity and stability in lending protocols. Overall, a higher overcollateralization ratio reflects a lower risk for lenders but may limit borrowers’ access to funds, as they must lock up more assets to secure a loan.