In the context of decentralized finance (DeFi), the liquidation ratio is crucial for determining when a borrower’s assets will be liquidated due to insufficient collateral backing their loans. When the value of the collateral falls below the liquidation ratio, the lender has the right to liquidate the collateral to recover the loan amount. For example, if a liquidation ratio is set at 150%, it means that for every $150 of collateral, the borrower can take a loan of $100. Liquidation occurs in real-time, depending on market fluctuations, and failure to maintain a sufficient liquidation ratio can lead to significant losses for borrowers.