What Is Collateral?

Collateral is an asset deposited as security to borrow funds in decentralised finance lending protocols and leveraged trading. In DeFi lending, collateral must typically exceed the borrowed amount (overcollateralisation), with protocols enforcing a loan-to-value (LTV) ratio that determines maximum borrowable amounts, commonly 60-80% depending on asset risk. When collateral value drops below protocol thresholds relative to outstanding debt, positions trigger automatic liquidation, where the collateral is sold to repay loans and protect the protocol from insolvency.

See also

• Lending protocol

• Leverage

• Liquidation

• Aave

• Decentralised finance

• Lending pool

• Recursive looping