Glossary · O
Over-Collateralised
A borrowing position or stablecoin design where the value of collateral deposited exceeds the value of assets borrowed. For example, depositing $150 of ETH to borrow $100 of USDC is 150% collateralised (50% over-collateralised). Over-collateralisation is required in DeFi lending because there is no credit scoring or legal enforcement — the excess collateral provides a buffer against price volatility before liquidation.
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How Over-Collateralised works in practice
Over-collateralised means the value locked exceeds the value borrowed. It is the default in DeFi because there is no identity, no credit assessment and no legal recourse — the collateral has to stand alone.
Worked example
Borrowing 1,000 against 2,000 of collateral is 200% collateralised. The surplus absorbs price movement between the position becoming unsafe and a liquidator being able to close it.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
It is capital-inefficient by design, and that is the price of permissionless credit. Protocols offering dramatically better ratios are usually relying on correlated collateral, which behaves well right up until correlation breaks.
Over-Collateralised: common questions
- What is Over-Collateralised?
- A borrowing position or stablecoin design where the value of collateral deposited exceeds the value of assets borrowed. For example, depositing $150 of ETH to borrow $100 of USDC is 150% collateralised (50% over-collateralised). Over-collateralisation is required in DeFi lending because there is no credit scoring or legal enforcement — the excess collateral provides a buffer against price volatility before liquidation.
- How does Over-Collateralised work in practice?
- Over-collateralised means the value locked exceeds the value borrowed. It is the default in DeFi because there is no identity, no credit assessment and no legal recourse — the collateral has to stand alone.
- Can you give an example of Over-Collateralised?
- Borrowing 1,000 against 2,000 of collateral is 200% collateralised. The surplus absorbs price movement between the position becoming unsafe and a liquidator being able to close it.
- What do people get wrong about Over-Collateralised?
- It is capital-inefficient by design, and that is the price of permissionless credit. Protocols offering dramatically better ratios are usually relying on correlated collateral, which behaves well right up until correlation breaks.