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How Does “Over-Collateralization” Mitigate the Risk of a DeFi Bank Run?

Requires borrowers to deposit more than they borrow, creating a buffer that protects lenders' capital from price drops.
Greeks.Live20.11.25

How Does “Over-Collateralization” Mitigate the Risk of a DeFi Bank Run?

Over-collateralization requires borrowers to deposit more value than they borrow (e.g. $150 collateral for a $100 loan).

This buffer ensures that even if the collateral asset price drops, the protocol has time to liquidate the collateral before the loan becomes under-collateralized. This process protects the lenders' capital, reducing the fear that drives a bank run.

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