Collateral
An asset locked to back a loan or leveraged position, sold off automatically if its value drops too far.
Collateral is what you put up to borrow. Lock ETH in a lending protocol and you can draw a stablecoin loan against it. The deposit secures the lender: if you don't repay, the contract sells your collateral to cover the debt.
DeFi usually demands more collateral than you borrow. A $1,500 ETH deposit might back a $1,000 loan, the buffer absorbing price swings.
That buffer can vanish fast. If ETH drops and your collateral value nears the debt, the protocol liquidates it—often at a discount, sometimes at the worst possible moment.
Related terms
Backing a loan or minted stablecoin with deposited assets, usually worth more than the debt to absorb price swings.
LiquidationThe forced closing of a leveraged position when losses drop its collateral below the required minimum.
Lending ProtocolA DeFi platform where users deposit crypto to earn interest and others borrow against collateral, all managed by smart contracts.
LeverageBorrowed money used to control a larger position than your own capital would allow, amplifying gains and losses.