DeFi 10104 September 2021

What is collateral in DeFi?

DeFi Collateral

Summary

  • Collateral offered in DeFi should be of higher value than borrowed asset
  • ETH is the most common type of collateral in DeFi
  • DeFi collateral works the same as fiat collateral

DeFi collateral is simply the pledging of digital assets by investors when they want to take out a loan. In Decentralized finance, the collateral offered is required to be different from the assets one wants to borrow.

For instance, an investor can mortgage their ETH to borrow DAI. DeFi collateral works in the same way loaning works with fiat currencies.

To avoid a shortfall in liquidity, investors are advised to mortgage assets worth more than the loan, with a ratio range of at least 125% and not more than 150%. For instance, mortgaging $100 ETH for $70 DAI gives a loan ratio of ~143%.

Aave, Compound, and Maker are the largest DeFi lending protocols.

Kibet Elikana
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