GlossaryIntermediate

Over-Collateralization

Requiring collateral worth more than the loan itself, to protect against price swings.

Over-collateralization means requiring a borrower to post collateral worth more than the amount they're borrowing, which is the common approach in DeFi lending, unlike traditional loans that may rely on credit history instead.

This buffer helps protect the lending protocol against the collateral's value dropping before a loan can be repaid or liquidated.

Examples

A protocol might require $150 of collateral for every $100 borrowed.
Over-collateralization is one reason DeFi lending can operate without traditional credit checks.