Collateral
Last updated 17 October 2026Last verified 17 October 2026
What is collateral in DeFi?
TradFi equivalentA Lombard loan against pledged securities, except the lender cannot assess the borrower and cannot sue them, so the haircut does all the work a credit file would do.
The definition above explains why DeFi overcollateralizes. The mechanism runs on two parameters per asset. A loan-to-value limit caps how much can be borrowed against a deposit, and a higher liquidation threshold marks the point at which anyone may close the position. The gap between them is the borrower's buffer, wider for volatile tokens.
Every one of those comparisons runs through an oracle. The protocol does not know what the collateral is worth, only what its price feed reports, so a stale or manipulated feed can trigger a liquidation the market never justified, or fail to trigger one it did.
Repo and margin lending are the right comparison, and they hold on the haircut. They break on discretion and on what the collateral is. A prime broker can extend a deadline or accept substitute assets. A lending contract does none of that, and the collateral itself is often a claim on something else: an LST, a wrapped token, or a stablecoin whose depeg is precisely the event that turns a safe position into a liquidated one.
The decision for a borrower is how much of the buffer to use. Borrowing to the limit maximizes capital efficiency and leaves no room for an oracle update in a fast market, while borrowing well inside it trades return for time.