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What Is ‘Over-Collateralization’ and Why Is It Common in Immutable DeFi Lending?

Borrowers deposit more collateral than the loan value to create a safety buffer against volatility, ensuring the loan is covered before liquidation.
Greeks.Live05.11.25

What Is ‘Over-Collateralization’ and Why Is It Common in Immutable DeFi Lending?

Over-collateralization means a borrower must deposit more value in collateral than the value of the loan they receive. It is common in immutable DeFi lending because the lack of legal recourse or human intervention requires a safety buffer.

The extra collateral acts as a guarantee against price volatility and ensures that the contract can always liquidate the collateral to cover the loan before the borrower's debt exceeds the collateral's value.

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