Definition
Assets locked in a smart contract to secure a loan in DeFi. If the value of the collateral falls below a threshold, the protocol automatically liquidates it to repay the debt.
Why It Matters
Collateral requirements protect DeFi lending protocols from default risk. Understanding collateral and liquidation is critical before borrowing in DeFi.
Example
A user deposits $1,500 of ETH as collateral to borrow $900 of USDC from Aave — a 150% collateralization ratio.
Related Terms
DeFi
Liquidation
Smart Contract
Stablecoin