Why Is Over-Collateralization Necessary in Many DeFi Protocols? ⎊ Path

Why Is Over-Collateralization Necessary in Many DeFi Protocols?

Over-collateralization is necessary to create a safety buffer against the high volatility of crypto assets. Since the collateral's value can drop quickly, requiring more collateral than the debt ensures the protocol can liquidate the position and cover the debt even after a sudden price crash, maintaining the protocol's solvency and protecting the funds of other users.

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