Collateral is an asset pledged by a borrower to a lender as security for a loan or margin trading position. If the borrower defaults or the position moves against them beyond a certain threshold, the lender can seize the collateral to recover losses. In crypto DeFi lending, collateral requirements are often over-collateralized due to the volatility of digital assets, meaning borrowers must deposit more value than they borrow.
Example
“He deposited $10,000 in ETH as collateral on the DeFi platform to borrow $6,000 in stablecoins for trading.”