What is crypto collateral?

What Is Crypto Collateral?

Crypto collateral is digital assets you lock in a lending protocol or platform to borrow other assets (crypto or fiat). The collateral secures the loan. If you do not repay or the value of your collateral falls too much, the protocol or platform can sell (liquidate) it to cover the debt. You borrow only up to a percentage of the collateral value (e.g. 50–80%) to allow for price swings.

Why It Is Used

You can get liquidity without selling your crypto (and possibly triggering tax). You keep exposure to the collateral while using the borrowed funds. Over-collateralization protects the lender from default when prices drop.

Risks

If the collateral price drops, you may need to add more collateral or get liquidated. Liquidations can happen quickly in volatile markets. Understand the loan-to-value ratio and liquidation threshold before borrowing.