Reviewed and updated: October 19, 2026.
Collateral gives a stablecoin system something to sell when a borrower cannot maintain a position. Overcollateralization provides a buffer, but the buffer can disappear before collateral is sold. The critical question is whether the system can realize enough value, in time, after costs.
Read the ratio correctly
A simplified collateralization ratio is collateral market value divided by outstanding debt. A fictional vault containing $1,800 of collateral against 1,000 dollar-denominated units of debt has a ratio of 180%. If its assumed liquidation threshold is 150%, it reaches that threshold when collateral falls to $1,500, a decline of 16.7%, holding the debt constant.
A 30% collateral-price drop takes the same vault to $1,260 and a 126% ratio. It would already have crossed the assumed threshold. These are teaching numbers, not current parameters for a named vault. Accruing debt, fees, oracle timing and multiple collateral assets can change the calculation.
Triggering liquidation is not the same as completing it
Sky's collateral-liquidation documentation describes moving an unsafe vault's collateral and debt into the liquidation process, then attempting to sell collateral for DAI. Its documented auction design includes pricing, reset conditions and governance-set parameters. The same documentation lists risks, including stale oracle inputs and poorly chosen auction limits.
Suppose a separate fictional liquidation must cover $1,000 of debt and $80 of combined penalties and costs. If an auction realizes $1,050, the $1,080 target is short by $30. An earlier screen valuation of $1,200 would not prevent that shortfall. An automated trigger is therefore not a guarantee of system solvency.
Separate borrower risk from stablecoin-holder risk
| Position | Main question |
|---|---|
| Borrower with an open vault | What price or debt change triggers liquidation, and what costs apply? |
| Stablecoin holder | What supports the peg and what exit route is available? |
| Auction participant | Can purchased collateral be valued, financed and sold economically? |
| Governance participant | Who can alter collateral eligibility, risk limits and emergency controls? |
A vault can be liquidated while the stablecoin remains near its target. A stablecoin can trade below its target while some individual vaults remain well collateralized. Combining those two observations into a single safe-or-unsafe label loses the mechanism.
Maker-era terminology and the Sky ecosystem
Older material often describes DAI through MakerDAO and MKR. The current documentation is organized under Sky and includes DAI, USDS and SKY. Its USDS page describes a DAI–USDS converter and an upgradeable token design. Read the relevant contract and governance documentation for the specific asset and route instead of assuming an older article describes the entire current system.
This page does not publish an unverified current collateral composition or repeat the earlier claim that USDC represented over 60% of DAI backing in March 2023. A composition statement needs a dated balance sheet and a clear denominator.
Trace dependencies beyond the token's category
A collateral asset can itself depend on a custodian, a bridge, another stablecoin issuer or an off-chain claim. Seeing its token balance on-chain does not reveal every underlying obligation. Likewise, open smart-contract code can coexist with upgrade permissions, price-feed administrators or concentrated governance.
For a useful review, list each collateral asset, valuation source, liquidation route and control authority. Add an explicit unknown where you cannot verify the link. Collateral quality, liquidation execution and governance are separate parts of resilience; none should be inferred merely from the phrase crypto-backed.
Sources and scope
- Sky Protocol Docs: collateral liquidation and known risks
- Sky Protocol Docs: USDS and DAI conversion
- Maker Improvement Proposal 45: historical Liquidations 2.0 design
Continue reading: Stablecoin lifecycle · Algorithmic peg mechanisms · Tokenized off-chain claims
Editorial update: Corrected solvency guarantees and all-on-chain assumptions; separated historical Maker terminology from current Sky documentation; added threshold and auction-shortfall calculations.