Yields & Returns
Collateral
Loan Collateral
Asset pledged to secure debt and exposed to seizure
Definition
Collateral is an asset pledged to secure debt and available for seizure under the loan’s rules. Its accepted borrowing value depends on oracle prices, loan-to-value limits and liquidation thresholds, not merely its market capitalization.
Example
At a hypothetical 60% maximum LTV, $2,000 of collateral permits $1,200 of initial debt. If the liquidation threshold is 75%, that debt becomes eligible for liquidation when collateral falls below $1,600, ignoring interest.
How it works
The protocol locks or earmarks supplied assets and assigns borrowing capacity. If threshold-adjusted collateral falls below debt, liquidators can repay debt in exchange for collateral plus a bonus.
Risks to Consider
- A price fall or rising debt can trigger seizure
- A frozen or illiquid collateral token may not cover debt
- Oracle overvaluation can hide insufficient backing
Common Questions
Is collateral the same as a reserve?
Collateral secures a particular obligation and can be seized. Reserves are assets held to back issuance or redemption; the legal rights and liquidation mechanisms may differ.
