Collateral
Assets locked as security against a loan, seized by the protocol if the borrower's position falls below the liquidation threshold.
In DeFi lending, collateral is crypto deposited into a protocol as security for a loan. The collateralisation ratio — collateral value divided by loan value — must stay above a minimum threshold set by the protocol. Common ratios are 150% (borrowing up to $66 for every $100 of collateral) for volatile assets.
If the collateral value drops (due to market price falls) or the debt grows (due to interest) such that the ratio falls below the liquidation threshold, automated liquidators step in. They repay part of the loan and claim the collateral at a discount (liquidation penalty), restoring the protocol's solvency.
Stablecoins, ETH, and BTC are common collateral assets. Some protocols allow LP tokens or yield-bearing tokens as collateral, which introduces additional complexity and smart-contract risk.