Over-Collateralized

Definition ∞ Over-collateralized refers to a situation where the value of collateral provided for a loan significantly exceeds the value of the loan itself. This practice is common in decentralized finance to mitigate the risk of borrower default, especially given the price volatility of digital assets. It provides a safety margin for lenders against potential market downturns.
Context ∞ The concept of over-collateralization is central to the stability of many decentralized lending protocols, influencing loan-to-value ratios and liquidation thresholds. Ongoing discussions often address the optimal levels of collateralization required to ensure protocol solvency, the mechanisms for managing collateral during market stress, and the potential impact of regulatory scrutiny on these capital-intensive models.