> For the complete documentation index, see [llms.txt](https://docs.lif3.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.lif3.com/terrace/collateralization-model.md).

# Collateralization Model

An LP token's value is always supported equally by each of the underlying tokens in the token pair. The Lif3 Protocol needs to accurately assess the value of LP tokens to establish the amount of collateral required for borrowing and guarantee that borrowers cannot borrow more money than the value of their collateral.

The safety margin and liquidation incentive parameters for the lending pool are inputs into the Lif3 collateralization model, which calculates the collateral required for a loan.

This safety margin and liquidation incentive criteria make sure that there will always be enough collateral to pay back the loan and pay a liquidator in the event of liquidation, regardless of how much the price of the underlying tokens fluctuates.


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