Glossary · C
Collateral
Assets deposited as security for a loan. In DeFi lending (Aave, Compound), collateral must exceed the borrowed amount — called overcollateralisation. If the collateral value falls below the required ratio, it is automatically liquidated to repay the loan.
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How Collateral works in practice
Collateral is the asset you lock to borrow against. DeFi lending is almost entirely over-collateralised because there is no credit check and no recourse: the only thing making a loan safe is that the collateral is worth more than the debt and can be sold automatically if that stops being true.
Worked example
You deposit 10 ETH at 3,000 each — 30,000 of collateral — into a market with a 80% maximum loan-to-value. You can borrow up to 24,000 USDC. Borrowing the full amount leaves no headroom: a small fall in ETH puts you straight into liquidation range.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
Borrowing to the maximum the interface allows. The limit is the liquidation boundary, not a recommendation. Volatile collateral against a stablecoin debt can cross it during an ordinary overnight move, and liquidation is automatic and unsentimental.
Collateral: common questions
- What is Collateral?
- Assets deposited as security for a loan. In DeFi lending (Aave, Compound), collateral must exceed the borrowed amount — called overcollateralisation. If the collateral value falls below the required ratio, it is automatically liquidated to repay the loan.
- How does Collateral work in practice?
- Collateral is the asset you lock to borrow against. DeFi lending is almost entirely over-collateralised because there is no credit check and no recourse: the only thing making a loan safe is that the collateral is worth more than the debt and can be sold automatically if that stops being true.
- Can you give an example of Collateral?
- You deposit 10 ETH at 3,000 each — 30,000 of collateral — into a market with a 80% maximum loan-to-value. You can borrow up to 24,000 USDC. Borrowing the full amount leaves no headroom: a small fall in ETH puts you straight into liquidation range.
- What do people get wrong about Collateral?
- Borrowing to the maximum the interface allows. The limit is the liquidation boundary, not a recommendation. Volatile collateral against a stablecoin debt can cross it during an ordinary overnight move, and liquidation is automatic and unsentimental.