> For the complete documentation index, see [llms.txt](https://docs.unstable.money/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.unstable.money/users/collateralization-and-liquidation.md).

# Collateralization and Liquidation

The Unstable Protocol uses overcollateralization to ensure the stability of nUSD. This page explains how collateralization works and what happens during liquidation.

## Collateralization

Every nUSD in circulation is backed by more than $1 worth of collateral. The protocol requires users to maintain a minimum collateralization ratio for their positions. This ratio varies by collateral type but is typically at least 125%.

### Supported Collateral Types

Unstable accepts multiple types of high-quality collateral across different asset classes:

* **stS**
* **scETH**
* **scUSD**
* **wstkscUSD:** Wrapped staked scUSD
* **\[REDACTED]**
* **\[REDACTED]**

### Monitoring Your Collateral Health

Your position's health is determined by the ratio between your collateral's value and your debt. To calculate this:

Collateralization Ratio = (Collateral Value) / (nUSD Debt)

You can monitor your collateral health on the Unstable Protocol dashboard. It's important to maintain a healthy buffer above the minimum required ratio to protect against market volatility.

## Liquidation

Liquidation is the mechanism that ensures the protocol remains solvent even when collateral values drop.

### When Liquidation Happens

If a vault's collateral falls below the safe threshold (e.g., 125%), it becomes eligible for liquidation. This can happen due to:

1. A decrease in the market value of your collateral
2. A depeg of the collateral asset (for stablecoin collaterals)

### The Liquidation Process

When liquidation occurs:

1. The system detects that a position has fallen below the minimum collateralization ratio
2. The Stability Pool provides nUSD to cover the debt
3. The liquidated collateral (minus a penalty) is distributed to Stability Pool depositors
4. The user's debt is cleared, and any remaining collateral is returned to the user

### Liquidation Penalty

A liquidation fee is applied when positions fall below the minimum collateralization ratio. The exact fee varies by collateral type.

### How to Avoid Liquidation

To prevent liquidation:

1. Monitor your position regularly
2. Add more collateral when your ratio approaches the minimum threshold
3. Partially repay your debt to improve your collateralization ratio
4. Maintain a healthy buffer above the minimum required ratio


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