Crypto glossary

Collateral

Collateral is an asset you lock up to secure an obligation, such as a loan, a leveraged trading position or the creation of a stablecoin. If you cannot meet the obligation, the collateral can be sold to cover it.

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Why crypto relies on collateral

A bank lends based on your income and credit history. A DeFi lending protocol does not know who you are, so it secures loans the only way it can: by holding assets worth more than what you borrow. The same logic applies on exchanges, where the margin you deposit is collateral for a leveraged position, and in stablecoin systems like DAI, where locked crypto backs the coins issued.

An example

Say you deposit 1 ETH worth 2,000 dollars into a lending protocol that allows a 75 percent loan-to-value ratio (LTV). You can borrow up to 1,500 USDC. You keep exposure to ETH and get dollars to use, without selling. If ETH falls to 1,700 dollars, your collateral is worth less and your loan is a larger share of it. Past a set threshold, the protocol liquidates part of your ETH to repay the loan, usually with a penalty.

What makes good collateral

Protocols prefer assets that are liquid, widely traded and reliably priced, because collateral has to be sellable quickly in a falling market. That is why ETH, BTC in wrapped form and major stablecoins are common collateral, while small tokens are allowed only with strict limits or not at all. Riskier collateral gets a lower maximum LTV.

Risks

The biggest risk is that the collateral drops in value faster than you can react, especially during sharp market moves or at night. Liquidations can happen in minutes. Using a volatile asset as collateral to borrow more of the same asset multiplies the risk.

There are also system risks: a faulty price oracle can trigger liquidations at the wrong price, a smart-contract bug can put deposits at risk, and on a centralized platform the collateral is exposed to that company's solvency.

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Frequently asked questions

Why do crypto loans need more collateral than the loan?

Because prices are volatile and borrowers are anonymous. A buffer gives the protocol time to sell the collateral before it is worth less than the debt.

Can I lose my collateral?

Yes. If its value falls past the liquidation threshold, part or all of it can be sold to repay the loan, and a liquidation penalty usually applies.

Is margin the same as collateral?

Margin is the collateral you post for a leveraged trade on an exchange. The idea is the same: it absorbs losses before the platform does.

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All glossary terms · Educational reference only — not investment, legal, tax or financial advice.