The term ‘Collateralized’ in crypto finance denotes a financial position or asset that is secured by other assets held as collateral. This arrangement provides a safety net for a lender or counterparty, mitigating default risk in various decentralized finance (DeFi) operations. It is a fundamental risk management tool within crypto lending and derivatives markets.
Mechanism
An individual or entity deposits digital assets into a smart contract as security. In return, they receive a loan or credit, often in another cryptocurrency or stablecoin. Should the value of the deposited collateral fall below a predefined liquidation threshold, the smart contract automatically sells the collateral to repay the outstanding debt.
Methodology
The strategic application of collateralization establishes creditworthiness in a permissionless environment. It underpins stablecoins that maintain their peg through overcollateralization and enables capital-efficient leverage for traders. This framework permits the creation of robust lending markets and synthetic asset protocols, reducing reliance on traditional intermediaries.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
