Collateral
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In Brief
Collateral is an asset pledged to secure a loan or leveraged position — in DeFi, borrowers typically lock crypto worth more than they borrow, and the protocol automatically liquidates it if its value falls too far.
What Is Collateral?
Collateral is an asset pledged to secure a loan or leveraged position. If the borrower fails to repay — or the position moves too far against them — the lender takes the collateral instead. In crypto, collateral is what makes lending possible between strangers: code enforces the pledge, so no credit check or trust is needed.
Because crypto prices move fast, DeFi lending is usually overcollateralized: you lock up more value than you borrow, and the buffer absorbs price swings.
How Collateral Works in DeFi
You deposit an asset into a lending protocol as collateral.
You borrow a different asset against it, up to a limit set by the collateral's value and the protocol's ratio.
The protocol continuously tracks your position's health as prices move.
If your collateral's value falls below the required threshold, the protocol liquidates it — selling it automatically, usually with a penalty — to repay the loan.
Risks to Understand
Liquidation is automatic and unsentimental: a sharp dip can wipe out your collateral even if the price recovers minutes later.
Volatile collateral is fragile collateral: the wilder the asset, the bigger the buffer you need.
Stablecoins depend on it too: many are backed by collateral, and their stability is only as good as what backs them.
Smart-contract risk: the protocol holding your collateral is code that can fail or be exploited.
Collateral and Trust Wallet
Through Trust Wallet's dApp browser you can reach DeFi lending protocols while your keys stay on your device, and the Security Scanner reviews transactions before you sign. If you borrow against collateral, know your liquidation price before you confirm — not after.