Collateralization

Collateralization is the process of pledging an asset as security to back a loan or financial position. In DeFi, users lock up cryptocurrency as collateral to borrow other assets or mint stablecoins. If the value of the collateral drops below a certain threshold (the liquidation ratio), it may be automatically sold to repay the debt. Over-collateralization, where the collateral exceeds the loan value, is common in DeFi to account for price volatility.