Collateralization
Backing a loan or minted stablecoin with deposited assets, usually worth more than the debt to absorb price swings.
DeFi lending runs on collateral. To borrow $1,000 of a stablecoin on Aave or MakerDAO, you typically lock $1,500 or more in ETH—overcollateralization that protects the protocol when prices fall.
The collateralization ratio is the value of your deposit divided by your debt. Drop below the protocol's minimum and your position gets liquidated, with collateral sold to repay lenders.
Stablecoins use the same logic. DAI is overcollateralized by crypto; fiat-backed coins like USDC hold reserves instead. Either way, the backing is what keeps the peg honest.
Related terms
An asset locked to back a loan or leveraged position, sold off automatically if its value drops too far.
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.
StablecoinA crypto token designed to hold a steady value, almost always pegged one-to-one with the US dollar.