Overview
Collateral is an asset pledged to back a loan or financial position. In DeFi, it is usually held in a smart contract and measured against the amount borrowed. Its value determines borrowing capacity and the risk of liquidation.
How It Works
A borrower deposits collateral, and the protocol allows them to borrow up to a loan-to-value ratio. If the collateral's price falls, the position can be liquidated to repay the loan. Volatile assets require higher collateralization ratios than stable ones.
Why It Matters
Collateral is what makes undercollateralized trust possible in a trustless system: lenders are protected because loans are always backed. It also powers stablecoins and margin trading. Choosing appropriate collateral and ratios is central to protocol risk design.
Related Concepts
Collateral is the basis of Lending, Loan-to-Value, and Liquidation, and it underpins Crypto-Backed Stablecoins and Collateralized Debt Positions.