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.
Glossar
Immutable
Integrity ⎊ Immutable characteristics within cryptocurrency, options trading, and financial derivatives fundamentally address data veracity and tamper-resistance, crucial for trustless systems.
DeFi Lending
Collateral ⎊ Decentralized finance lending protocols fundamentally rely on collateralization to mitigate counterparty risk, a core tenet derived from traditional secured lending practices.