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THE GLOSSARY / W

What is collateral?

Collateral is an asset pledged to support a loan. Its value helps determine how much can be borrowed and when a position becomes unsafe.

Version 1

Collateral is an asset pledged to support a loan. If the loan becomes insufficiently backed, some or all of that asset can be taken through the lending system’s rules.

For a hypothetical example, a person deposits assets worth $1,000 to support a $500 loan. If those assets lose value, the borrower still owes the debt. These amounts are not actual loan terms.

A little more technical

Crypto lending systems compare debt with a risk-adjusted value of collateral. Each accepted asset can have different limits. Interest and changing prices affect the position even without a new loan.

Common misunderstanding

Depositing collateral is not paying off the debt. It backs the loan while the repayment obligation remains.

No prerequisite reading is needed. Source: Aave’s collateral and health-factor explanation.