How Does Overcollateralization Mitigate Risk in DeFi Lending?

Overcollateralization means the value of the assets locked as collateral is greater than the value of the loan received. This buffer protects the lender from sudden drops in the collateral's price.

If the collateral's value falls, the excess collateral absorbs the loss before the loan becomes under-collateralized, ensuring the lender can always recover the full loan amount upon liquidation.