What Is the Concept of ‘Over-Collateralization’ in DeFi Derivatives?
Over-collateralization is a DeFi risk management technique where a user must deposit more collateral than the value of the loan or position they are taking out. For example, a $100 loan might require $150 in collateral.
This large buffer minimizes the chance of a deficit upon liquidation, making the use of ADL or socialized loss unnecessary.
