Collateral
Assets pledged as security when borrowing cryptocurrency in DeFi. If the value of the collateral drops below a required threshold, it may be liquidated to repay the loan. Overcollateralization is common in DeFi lending protocols.
Why It Matters
In cryptocurrency lending, collateral is an asset pledged to secure a loan. Understanding how collateral works is essential for managing risk, ensuring that lenders can recover their investments if borrowers default.
Example
If you borrow against your Bitcoin, you may need to deposit a certain amount as collateral. This gives the lender assurance that they can recover their funds in case you cannot repay your loan.
Beginner Context
For beginners, the concept of collateral is fundamental in learning about borrowing and lending in crypto. It ensures that both parties are protected in financial transactions and provides a safety net in decentralized finance.
Mike Starr
Founder, CryptoWizardTools · M.S. Organizational Management
Last reviewed: August 2026
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