Collateral and overcollateralisation

Collateral is an asset pledged to secure a loan or a leveraged position. If the borrower fails to keep the position healthy, the lender can sell the collateral to recover the debt.

In crypto, collateral is usually other crypto. DeFi lending protocols require overcollateralisation, meaning the collateral must be worth more than the loan, because prices can fall fast and there is no credit check or court to chase defaulters. The loan-to-value (LTV) ratio shows how much you can borrow against an asset; for example, a 75% maximum LTV means $1,000 of collateral supports up to $750 of borrowing. Some protocols display a "health factor" that triggers liquidation when it falls below 1.

Overcollateralisation also underpins some stablecoins. DAI, now part of the Sky ecosystem, is created when users lock crypto worth more than the DAI they mint. On exchanges, the margin you post for futures trading is collateral too. Volatile collateral can be liquidated in sudden crashes.