What Is the Definition of “Under-Collateralized” in a Lending Protocol Context?

An under-collateralized loan is one where the market value of the collateral provided by the borrower is less than the value of the debt owed, plus any liquidation buffer. This state typically occurs when the collateral's price drops significantly or the borrowed asset's price rises.

An oracle manipulation attack artificially creates this state by falsely inflating the collateral's value, allowing the attacker to borrow more than the true value.