Liquidity Coverage Ratio (LCR)
Liquidity Coverage Ratio (LCR) is a tool used to measure liquidity risk. LCR is defined as the proportion of highly liquid assets held by an organization to ensure that they maintain an ongoing ability to meet their short-term obligations (cash outflows for 30 days) in a stress situation.
LCR is an essential liquidity risk measure in traditional finance. Most regulators require a certain LCR to ensure Banks' health under stress. It is typically used to model how a Financial Institution would perform under stress- specifically their ability to maintain required cash outflows (such as interest payments and other debt obligations).
Because LCR is built on two basic principles: liquid assets and liabilities, it is a financial primitive that can be effectively applied to DeFi. Doing so provides a qualitative assessment of how two or more protocols perform side-by-side under the same conditions.
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