Collateral

Collateral refers to any asset pledged to secure a loan, borrowing position, or other financial obligation. In crypto, collateral is often deposited into a lending protocol or trading account so a user can borrow another asset or support a leveraged position. The collateral is designed to act as protection for the lender or protocol in the event the borrower cannot repay or if the value of the position falls. Crypto collateral can be volatile, so many lenders require borrowers to provide more collateral than the amount borrowed. This is called overcollateralization.

A user wants to borrow $2,000 worth of a stablecoin from a lending protocol but must deposit $5,000 worth of ETH, which serves as the collateral backing the loan.