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Collateral
In the context of cryptocurrency, collateral refers to assets pledged by a borrower to secure a loan. Collateralized loans in crypto are common in decentralized finance (DeFi) platforms, where users can borrow stablecoins or other assets by locking up their cryptocurrencies as collateral. The borrower must maintain a sufficient collateral ratio to prevent liquidation, where the platform can sell the collateral if its value falls below a certain threshold. For example, on MakerDAO, users can lock up Ether (ETH) as collateral to borrow DAI, a stablecoin pegged to the US dollar. If the value of ETH drops significantly, the borrower's collateral may be liquidated to cover the loan. Collateral-based lending allows borrowers to access liquidity without selling their assets, but it also exposes them to risks, particularly during periods of high volatility.
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