Overcollateralisation

Overcollateralisation is the standard safety design in DeFi lending: a borrower must lock collateral worth more than the loan they take out. A protocol might require one hundred and fifty dollars of volatile collateral for every hundred dollars borrowed, expressed as a collateral ratio or a loan-to-value limit. Because on-chain lenders cannot check credit history or pursue a borrower in court, the surplus collateral is what protects depositors when prices fall. If the collateral value drifts toward the required ratio, the position becomes eligible for liquidation and is sold automatically. Borrowers therefore watch a health factor, and volatile collateral demands a far larger buffer than a stablecoin does. The same principle backs crypto-collateralised stablecoins.