How to use your tokenized investments

In the field of decentralized finance (DeFi) and investment in real estate tokens, managing collateralization is essential to ensure the stability of your assets and protect you against liquidation risks. In this article, we'll discuss why it's essential to maintain a secure collateralization ratio. We will also explain key concepts such as TVL (Total Value Locked) and LTV (Loan-to-Value), as well as teaching you how to calculate the health factor of your positions. With this information, you'll be able to make more informed decisions and effectively protect your investments.

The importance of a secure collateralization ratio

A secure collateralization ratio is essential to protect against liquidation. This ratio measures the ratio between the value of the collateral and the amount of the loan. A high ratio means greater security, while a low ratio exposes you to greater liquidation risk if the value of your assets decreases.

1. Constant Market Monitoring: As if you were watching the sea to see if the tide rises, use analysis tools to follow market trends and adjust your collateral as needed. This will allow you to take timely action to protect your investments.
2. Maintaining a High Collateralization Ratio: Think of this ratio as the distance between your castle and the shore. The farther from the shore your castle is, the less danger you will have, reducing the likelihood that it will be swept away by a wave (that is, that your assets will be liquidated).
3. Using Flash Loans: Flash loans are your rescue team always ready to act. They allow you to adjust your collateral quickly without selling your assets, ensuring that your castle stands firm no matter what happens.

Importance of constant market monitoring

The cryptocurrency market is very changeable, and conditions can change quickly. Keeping constant monitoring of the market allows you to react in time and avoid unnecessary liquidations. Use alerts and analysis tools to stay up to date.

Market fluctuations can significantly affect collateralization. A sudden drop in the value of the collateral can trigger a liquidation. It's important to understand how market changes affect your collateralized assets and to be ready to act quickly.

Staying informed about market trends allows you to anticipate movements and make well-informed decisions. Sign up for financial newsletters, follow market analysts and use analysis tools to keep abreast of market conditions.

Example of risk management

Let's say you have collateralized tokens worth 10,000 USDT and you get a loan of 7,000 USDT. If the value of your tokens drops to 8,000 USDT, your collateralization ratio goes from a safe 70% to a dangerous 87.5%. To prevent your assets from being sold, you could add more collateral or repay part of the loan, thus maintaining the stability of your investments.

Now, imagine that you collateralize 10,000 USDT in cryptocurrency and take out a more conservative loan of 4,000 USDT, or 40% of the value of your collateral. If the value of your assets drops by 20%, to 8,000 USDT, your collateralization ratio rises to a still manageable 50%, which protects you much better against liquidation.

What are TVL and LTV and why are they so important

El Total Value Locked (TVL) refers to the total value of assets locked on a DeFi platform. A high TVL indicates trust in the platform and the availability of liquidity, making it more secure and stable for investors.

• Importance of TVL: Knowing the TVL of a platform is like knowing how much water there is in a lake before deciding to fish in it. A high TVL tells you that the platform has a large number of assets locked, indicating stability and trust on the part of other investors. This is important because a platform with a high TVL is less susceptible to market manipulation and more capable of handling large transactions without negatively affecting prices. As an investor, a high TVL gives you peace of mind that you can enter and exit your positions without causing a significant fluctuation in the market.

El Loan-to-Value (LTV), on the other hand, is the ratio between the value of the loan and the value of the collateral. A higher LTV implies greater liquidation risk if the value of the collateral falls. Knowing the LTV of your loan is like knowing how much space you have to maneuver your car in a tight parking lot. A low LTV gives you more room for safety: if the market moves against you and the value of your collateral falls, you still have a cushion to avoid liquidation. On the other hand, a high LTV is like parking too close to the limit; any small movement could cause you problems. Maintaining a healthy LTV helps you protect your investments and minimize liquidation risk, especially in volatile markets.

• Example of LTV: You deposit 2,000 USDT in cryptocurrency as collateral and borrow 1,000 USDT. The LTV is 50%. If the value of the collateral falls to 1,500 USDT, the LTV increases to 66.7%, increasing liquidation risk. In this case, the investor should consider adding more collateral or paying part of the loan to maintain a secure LTV, thus protecting himself from potential losses.

Health Factor and Its Importance

The health factor is a key metric for measuring the security of your collateral in relation to the loan you have taken out. A high health factor means that your collateral is of sufficient value to cover the loan, while a low factor indicates an imminent liquidation risk. You can calculate it yourself using the following formula:

Health Factor = (Collateral Value)/(Loan Value)

A health factor of 1.5 means that your collateral is 1.5 times the value of your loan. If the factor falls below 1.5, you should consider adding more collateral or reducing your loan to maintain security.

Steps to Calculate the Health Factor:

1. Determine the Value of the Collateral: Add up the current value of all the assets you have collateralized. For example, if you have collateralized cryptocurrency worth 15,000 USDT, this is your collateral value.
2. Determine the Value of the Loan: Add up the total amount of the loan you've taken out. For example, if you have taken out a 10,000 USDT loan, this is your loan value.
3. Divide the Collateral Value by the Loan Value: Use the above formula to find the health factor.

So assuming that you have collateralized cryptocurrency worth 15,000 USDT and have taken out a loan of 10,000 USDT. The calculation would be:

Health Factor=15,000 USDT /10,000 USDT=1.5

In this case, your health factor is 1.5, which indicates that your collateral is 1.5 times the value of your loan.

How to maintain a secure collateralization ratio and avoid liquidation

• Monitor your positions regularly: Use tools that alert you to changes in the value of your assets.
• Add extra collateral if needed: To maintain a high health factor, you can add more tokens to your collateral.
• Pay part of the loan: Reducing the loan amount can help improve your collateralization ratio and your health factor.

Linking to Other Articles

As we mentioned in the previous article about “Benefits, Risks and Strategies of Collateralization“, maintaining a secure collateralization ratio is key to protecting your investments and taking full advantage of the benefits of collateralization. In this article, we delve into the metrics and formulas that help you manage the security of your portfolio.

Conclusion

Collateralization management is a fundamental pillar in decentralized finance and tokenized investments. Understanding and applying concepts such as the collateralization ratio, TVL and LTV, and calculating the health factor will help you protect your assets and avoid unnecessary risks. At Reental, we are committed to providing the education and tools necessary to keep your investments safe and profitable at all times.


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