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How Does Over-Collateralization Protect a DeFi Lending Protocol?

Over-collateralization requires the value of the deposited collateral to be significantly higher than the borrowed amount. This buffer provides a margin of safety against rapid price drops of the collateral asset.

It ensures that even a sharp market decline gives the protocol enough time to liquidate the collateral and fully repay the loan.

How Do Decentralized Finance (DeFi) Protocols Use Over-Collateralization to Manage Risk in Derivatives?
Why Is Over-Collateralization Necessary in Many DeFi Protocols?
How Does an NFT Lending Protocol Handle Partial Loan Repayment?
How Does Over-Collateralization Mitigate Systemic Risk in DeFi?