GlossaryIntermediate
Collateral
An asset pledged to secure a loan, which can be seized if the loan isn't repaid properly.
Collateral is an asset a borrower pledges to secure a loan. If the borrower fails to meet the loan's terms, the collateral can be used to cover the outstanding amount.
In DeFi lending, collateral is typically another cryptocurrency, held by a smart contract, and its value relative to the loan is monitored continuously to determine whether the position remains healthy.
Examples
- A DeFi loan might require depositing collateral worth significantly more than the amount borrowed.
- If collateral value falls too far relative to the loan, it can trigger liquidation.