Over-Collateralization
Over-collateralization means providing collateral worth more than the amount being borrowed or the financial obligation being secured.
✦ Key Insight
Crypto assets can be highly volatile and many DeFi loans do not use conventional credit checks. Requiring excess collateral provides a buffer against falling asset prices. The trade-off is capital efficiency. A borrower may need to lock $150 or more in assets to borrow $100.
✕ Common Misconceptions
Treating excess collateral as protection from every loss
Borrowing to the maximum limit
Ignoring rapidly changing collateral prices
Confusing collateral ratio with LTV
Ignoring liquidation penalties
Assuming all crypto lending is over-collateralized
Detailed Explanation
How It Works
A lending protocol establishes collateral requirements.
Suppose the required collateral ratio is 150%.
To borrow $1,000, the user would need at least $1,500 worth of qualifying collateral.
If the collateral falls toward the protocol's liquidation threshold, the borrower may need to repay debt or add collateral.
FAQs
Why borrow less than the collateral is worth?
The excess value protects lenders against price movements and borrower default.
Can over-collateralized loans still be liquidated?
Yes.