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What Is “Over-Collateralization” and Why Is It Common in DeFi Options?

Collateral value exceeds the loan/exposure value to buffer against volatility and prevent protocol insolvency.
Greeks.Live06.11.25

What Is “Over-Collateralization” and Why Is It Common in DeFi Options?

Over-collateralization means the value of the collateral locked in the smart contract is significantly greater than the value of the loan or the derivative exposure. It is common because DeFi lacks the legal recourse of traditional finance.

The extra collateral acts as a safety buffer against volatile price swings and ensures the debt can be covered even with rapid market drops. It reduces the risk of bad debt for the protocol.

How Do Decentralized Finance (DeFi) Protocols Use Over-Collateralization to Manage Risk in Derivatives?
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What Is “Over-Collateralization” and Why Is It Common in DeFi?
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