Definition ∞ A collateral deposit involves placing an asset as security to obtain a loan or to secure a financial position. In decentralized finance, this often means locking up cryptocurrency in a smart contract. This asset serves as a guarantee that the borrower will fulfill their obligations. Should the borrower default, the collateral can be liquidated to cover the outstanding amount.
Context ∞ Collateral deposits are fundamental to the operation of many DeFi lending platforms and stablecoin protocols. They enable users to access liquidity without selling their digital assets, but they also introduce liquidation risks if market prices fluctuate significantly. News often covers the stability of various collateralized systems and the impact of volatile asset prices on user positions.
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