DeFi Lending Collateral

Definition ∞ DeFi lending collateral refers to the digital assets locked by borrowers in decentralized finance protocols to secure a loan. This collateral serves as security for a cryptocurrency loan, ensuring repayment to lenders even if the borrower defaults. Protocols typically require overcollateralization, meaning the value of the locked assets exceeds the loan amount, to mitigate price volatility risks. Smart contracts automatically manage the collateral, liquidating it if the loan’s health factor drops below a predetermined threshold.
Context ∞ The state of DeFi lending collateral is currently characterized by discussions around capital efficiency and risk management in volatile markets. A key debate involves the suitability of various digital assets as collateral, particularly regarding their liquidity and price stability. Critical future developments include the introduction of real-world assets as collateral and the refinement of liquidation mechanisms to reduce market impact during periods of stress.