How Does the Concept of “Over-Collateralization” Apply to DeFi Lending?

Over-collateralization is a core concept in decentralized finance (DeFi) lending where a borrower must deposit collateral that is worth more than the loan amount (e.g. $150 in crypto for a $100 loan).

This is necessary because crypto assets are volatile and there is no legal recourse for lenders. The excess collateral acts as a buffer against price drops and ensures the loan can be liquidated if the collateral value falls too low.