# Risk Ratio

*[Documentation index](/llms.txt) · [Full index](/llms-full.txt)*

Risk ratios are the core mechanism that governs leverage limits and position safety in DeepBook Margin. Understanding these ratios is essential for managing margin positions effectively.

## What is a risk ratio?

The **risk ratio** is defined as:

```
risk_ratio = total_assets / total_debts
```

Where assets and debts are valued in a common denomination using oracle prices. A higher risk ratio indicates a safer position with more collateral relative to debt.

- **Risk ratio = 2.0**: You have 2 units of assets for every 1 unit of debt (50% LTV)
- **Risk ratio = 1.25**: You have 1.25 units of assets for every 1 unit of debt (80% LTV)
- **Risk ratio = 1.0**: Your assets exactly equal your debts (100% LTV, insolvent)

## Risk ratio thresholds

Each trading pair has four risk ratio thresholds that control different operations:

### Min Withdraw Risk Ratio

The minimum risk ratio required **after** withdrawing collateral.

- If a withdrawal would cause your position's risk ratio to fall below this threshold, the withdrawal is rejected
- This prevents users from extracting too much collateral and leaving an unsafe position
- Typically set to 2.0 (50% LTV), meaning you must maintain at least 2 units of assets per 1 unit of debt to withdraw

### Min Borrow Risk Ratio

The minimum risk ratio required **after** borrowing additional funds.

- If a borrow would cause your position's risk ratio to fall below this threshold, the borrow is rejected
- This determines the maximum leverage available for the trading pair
- A min borrow ratio of 1.25 allows approximately 5x leverage
- A min borrow ratio of 1.5 allows approximately 3x leverage

### Liquidation Risk Ratio

The risk ratio threshold at which a position becomes **eligible for liquidation**.

- When a position's risk ratio falls to or below this value, anyone can liquidate the position
- This is the danger zone - if price moves against you and your ratio hits this level, you can be liquidated
- Typically set between 1.1 and 1.2 depending on asset volatility

### Target Liquidation Risk Ratio

The target risk ratio that liquidation aims to restore the position to.

- Liquidation repays enough debt to bring the position back to a healthy state at this ratio
- This ensures the position is safe after liquidation, not just barely above the liquidation threshold
- Typically equals the Min Borrow Risk Ratio

## How leverage is determined

The maximum leverage for a trading pair is determined by the Min Borrow Risk Ratio:

$$\text{Max Leverage} \approx \frac{1}{1 - \frac{1}{\text{Min Borrow Risk Ratio}}}$$

| Min Borrow Risk Ratio | Approximate Max Leverage |
|-----------------------|--------------------------|
| 1.25 | 5x |
| 1.5 | 3x |
| 2.0 | 2x |

## Example: SUI/USDC position lifecycle

Consider a SUI/USDC position with the following risk parameters:
- Min Withdraw Risk Ratio: 2.0
- Min Borrow Risk Ratio: 1.25
- Liquidation Risk Ratio: 1.1
- Target Liquidation Risk Ratio: 1.25

**Opening a position:**
1. You deposit 100 USDC as collateral
2. You borrow 400 USDC worth of SUI
3. Total assets = 100 USDC collateral + 400 USDC worth of SUI = 500 USDC
4. Total debt = 400 USDC
5. Risk ratio = 500/400 = 1.25 (at the minimum borrow ratio)
6. You now have 5x leveraged exposure to SUI

**Price moves in your favor:**
1. SUI price increases 10%, your SUI is now worth 440 USDC
2. Total assets = 100 + 440 = 540 USDC, debt is still 400 USDC
3. Risk ratio = 540/400 = 1.35 (safer position)
4. You can withdraw some profit, as long as ratio stays above 2.0

**Price moves against you:**
1. SUI price drops 10%, your SUI is now worth 360 USDC
2. Total assets = 100 + 360 = 460 USDC, debt is still 400 USDC
3. Risk ratio = 460/400 = 1.15 (approaching liquidation)
4. If SUI drops further to 340 USDC worth, ratio = (100 + 340)/400 = 1.1 (liquidation threshold)
5. Your position can now be liquidated by anyone
6. Liquidator repays part of your debt and receives collateral plus a reward
7. After liquidation, your remaining position has a risk ratio of 1.25

## Liquidation rewards

When a position is liquidated:

- **User Liquidation Reward**: A percentage of the liquidated amount paid to the liquidator as incentive (typically 2%)
- **Pool Liquidation Reward**: A percentage paid to the margin pool to cover potential bad debt (typically 3%)

These rewards ensure liquidators are incentivized to maintain system health and the protocol has reserves against defaults.

## Risk management best practices

1. **Monitor your risk ratio**: Keep track of your position's health, especially during volatile markets
2. **Maintain a buffer**: Don't borrow up to the maximum - leave room for price fluctuations
3. **Set stop losses**: Use [TPSL orders](/onchain-finance/deepbook-margin/contract-information/tpsl) to automatically close positions before liquidation
4. **Understand the assets**: Higher volatility assets typically have stricter risk parameters (lower leverage)