<figure class="wp-block-image size-large"><img width="325px" height="183px" srcSet="https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/09/28233713/Optimal-collateral-ratio-375x211.webp 375w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/09/28233713/Optimal-collateral-ratio-662x372.webp 662w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/09/28233713/Optimal-collateral-ratio-768x432.webp 768w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/09/28233713/Optimal-collateral-ratio.webp 688w" sizes="(max-width: 425px) 150px, 450px" src="https://ll-blog-dev.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2023/09/28233713/Optimal-collateral-ratio.webp" alt="Optimal collateral ratio" class="wp-image-4094"/></figure>



The collateral ratio you set when opening your vault on Liquid Loans could have a drastic impact on your Liquid Loans experience.



Here&#x27;s how to <a rel="noreferrer noopener" href="https://www.thecoinzone.com/liquidloans/how-to-not-get-liquidated" data-type="URL" data-id="https://www.thecoinzone.com/liquidloans/how-to-not-get-liquidated" target="_blank">avoid getting liquidated</a> by finding the sweet spot between <a href="https://www.thecoinzone.com/tradfi/capital-efficiency-in-crypto" target="_blank" rel="noreferrer noopener">capital efficiency</a> and safety. 



<h2 class="wp-block-heading tablecontent">What is a Collateral Ratio? </h2>



In the context of Liquid Loans, the collateral ratio is the ratio between the US Dollar value of the <a href="https://www.thecoinzone.com/pulsechain/pulsechain-official-guide" target="_blank" rel="noreferrer noopener">PulseChain</a> (PLS) in your vault and its debt in <a rel="noreferrer noopener" href="https://www.thecoinzone.com/liquidloans/usdl-crypto" data-type="URL" data-id="https://www.thecoinzone.com/liquidloans/usdl-crypto" target="_blank">USDL</a>.



The minimum amount of collateral that you can have in your Vault at any point in time is 110%. If your individual <a href="https://www.thecoinzone.com/tradfi/what-is-collateral-ratio" target="_blank" rel="noreferrer noopener">collateral ratio</a> dips below that, your Vault will be liquidated.



For example, if you took out $2,000 USDL from the network on a timeless repayment schedule, you would need to put a minimum of 2,200 USD worth of PLS (110% of your debt) into your Vault as collateral. 



Having this minimum collateral ratio allows the <a href="https://www.thecoinzone.com/defi/defi-yield-protocol/" data-wpil-monitor-id="374">Liquid Loans</a> to always stay overcollateralized. This is why Liquid Loans is <a href="https://www.thecoinzone.com/liquidloans/crypto-bank-runs" target="_blank" rel="noreferrer noopener">immune to bank runs</a>, which have taken down many major banks and exchanges.



At any given point in time, there is always more PLS than USDL in the ecosystem. This means that even if every user wanted to liquidate their Vault at the exact same time and withdraw their PLS, the network would be able to comfortably meet this demand.



With Liquid Loans, you are free to set the <a href="https://www.thecoinzone.com/tradfi/what-is-collateral-ratio" data-type="URL" data-id="https://www.thecoinzone.com/tradfi/what-is-collateral-ratio" target="_blank" rel="noreferrer noopener">collateral ratio</a> of your Vault based on your own needs.



<h2 class="wp-block-heading tablecontent">110% — for those who are okay with risk</h2>



The minimum amount of collateral that someone can use to open a vault is 110%. This is known as the minimum collateral ratio (MCR).



However, even though you can open a Vault with a 110% collateral, it typically isn’t a good idea.



While 110% might seem like the right choice from the perspective of trying to be as capital efficient as possible, it could actually make you lose money over time.



If the collateral ratio of your Vault reaches any lower than 110%, anyone will be able to liquidate your Vault. People are highly incentivized to do so, as liquidating a Vault means receiving a compensation of 200 USDL + 0.5% of the Vault’s collateral.



This means that when you open a Vault with a collateral ratio of 110%, you have virtually no buffer from price fluctuations or the ecosystem entering <a href="https://docs.liquidloans.io/recovery-mode" target="_blank" rel="noreferrer noopener">recovery mode</a>.



In other words, having this low of a collateral ratio means that your vault is likely to get liquidated. 



<h2 class="wp-block-heading tablecontent">150% — for those who keep their eye on the ball</h2>



With a collateral ratio of 150%, you have more protection from being liquidated than if you used the minimum collateral ratio of 110%.



This collateral ratio is also sufficient to keep your Vault safe during recovery mode.



However, with this ratio, you will likely need to keep a constant eye on developments in the <a href="https://www.thecoinzone.com/pulsechain/pulsechain-news" data-type="URL" data-id="https://www.thecoinzone.com/pulsechain/pulsechain-news" target="_blank" rel="noreferrer noopener">PulseChain</a> (PLS) market.  



By keeping a close eye, you might be able to act fast enough to avoid your vault being liquidated at times when the price of PLS fluctuates. In that scenario, you could add collateral and/or repay debt to increase your collateral ratio when your vault is at risk of being liquidated.



While that might be an ideal option for some as it is incredibly capital efficient, keeping a close eye on the market can be a demanding process. In addition, it does not offer the same level of protection as higher collateral ratios. 



<h2 class="wp-block-heading tablecontent">250% — for those with a daily focus </h2>



With a 250% collateral ratio, you have a significant buffer that can help prevent your Vault from liquidation. 



Rather than having to keep a close eye on PLS price developments from one hour to the next, a 250% ratio could be better suited for those who only want to check in once a day. 



This means that 250% could be an ideal collateral ratio for people who want to keep their Vault safe from liquidation. While not as capital efficient as a lower ratio, such as 150%, the tradeoff of having peace of mind might make this the ideal option for some users.



<h2 class="wp-block-heading tablecontent">500% — safe, but not capital efficient</h2>



At 500%, your odds of being liquidated are next to none.



In order to be liquidated with a collateral ratio this high, the world would have to essentially conspire against you.



However, taking out a loan with a collateral ratio of 500% is hardly capital efficient. 



This means that 500% could be an option for the most cautious users, but would not be ideal for everyone.



That’s why setting the right collateral ratio for your Vault will largely depend on your personal needs and preferences.



<h2 class="wp-block-heading tablecontent">How Bad is a Liquidation?</h2>



Importantly, getting liquidated is not the end of the world.



When you get liquidated, your Vault will be closed. This means that you will lose your gas reserve and all the PLS in your Vault and the gas reserve, as it will be used to compensate other users in the network.



However, you will keep all of your borrowed USDL.



This means that getting liquidated results in losing a portion of your collatera’s dollar value. 



<h2 class="wp-block-heading tablecontent">What Collateral Ratio is Right for Me?</h2>



The perfect collateral ratio for your needs will depend on how you actually intend to use <a href="https://www.thecoinzone.com/liquidloans/why-real-estate-investors-understand-ll/" data-wpil-monitor-id="864">Liquid Loans</a>. 



If you are okay with the risk of your Vault being <a href="https://www.thecoinzone.com/defi/protocol-owned-liquidity/" data-wpil-monitor-id="755">liquidated and are focused purely on capital</a> efficiency, one of the lower-end examples on this list might actually be the right choice for you.



On the other hand, for people who are more risk averse and are willing to track price changes in the market, one of the mid-tier ratios on this list could be a great middle ground between capital efficiency and safety.



Meanwhile, for people who value the safety of their Vault above all else, higher-end ratios might be the right choice. 



Of course, you also have the option of setting a <a href="https://www.thecoinzone.com/tradfi/collateral-coverage-ratio/" data-wpil-monitor-id="1416">collateral ratio</a> that falls between any of the examples on this list. You can also adjust your collateral ratio over time, by paying off a portion of your debt or by adding to your collateral.



As a truly decentralized ecosystem, the beauty of <a href="https://www.thecoinzone.com/liquidloans/dont-dump-on-yourself-cash-out-with-liquid-loans/" data-wpil-monitor-id="1007">Liquid Loans</a> is that it puts your financial future in your hands. This means that you are free to make the decisions that are best for your personal needs.

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REMINDER: Just Because You CAN Have a 110% Collateral Ratio, Doesn't Mean You SHOULD!

Although you can have a 110% collateral ratio, it is extremely risky. Read on to learn how to maximize capital efficiency with risk.