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What Is the Significance of “Collateralization” in Decentralized Finance (DeFi)?

Collateralization is pledging assets to secure DeFi positions, often over-collateralized, to ensure solvency without a central authority.
Greeks.Live17.11.25

What Is the Significance of “Collateralization” in Decentralized Finance (DeFi)?

Collateralization is the process of pledging an asset to secure a loan or a derivative position in DeFi. Since there is no central authority, smart contracts require over-collateralization to ensure that the lender or counterparty is protected if the borrower defaults or the asset price moves adversely.

This mechanism is vital for maintaining solvency and trust in permissionless lending and derivative protocols.

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