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What Role Does Collateral Play in a Decentralized Finance (DeFi) Lending Protocol?

Collateral secures DeFi loans via smart contracts, enabling automatic liquidation if its value drops below a set threshold.
Greeks.Live22.11.25

What Role Does Collateral Play in a Decentralized Finance (DeFi) Lending Protocol?

In DeFi lending, collateral secures the loan, ensuring the lender is protected if the borrower defaults. Since there is no central authority, the collateral is locked in a smart contract.

If the borrower's health factor drops due to falling collateral value, the protocol automatically liquidates the collateral to repay the loan.

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