Collateral is an asset you put up as security when you borrow. If the loan isn't repaid, the lender can take the collateral. A flat is the collateral for a mortgage, and in DeFiDeFi (decentralised finance)Financial services, such as lending, saving and trading, that run on smart contracts on a blockchain instead of through a bank or other middleman. crypto is put up as collateral for a loan in another crypto.
Collateral in DeFi
Lending services on a blockchain, such as Aave, know nothing about you. There is no credit check and no payslip, so the collateral is the only security. That is why it has to be worth more than the loan, which is known as overcollateralisation.
Say you put up ether worth US$10,000 as collateral. You could then borrow, for example, US$6,000 in a StablecoinStablecoinA cryptocurrency designed to keep a steady price, usually by tracking the US dollar or another currency.. A smart contractSmart contractA program that runs on a blockchain and automatically carries out what it was written to do once certain conditions are met. holds the collateral while the loan is outstanding and returns it once you have repaid the loan with interest. How much you can borrow depends on the loan-to-value ratioLoan-to-value ratio (LTV)The size of a loan as a share of the value of its collateral. The maximum LTV sets how much you can borrow against it..
People do this, for example, to raise cash without selling their crypto. You still own the collateral and benefit if its price rises.
If the collateral falls in value
Crypto prices swing, and the value of the collateral swings with them. If it falls too far relative to the debt, the collateral is sold automatically to repay it. This is called LiquidationLiquidationWhen a loan or leveraged position is closed automatically because the collateral or margin no longer covers the debt., and you also lose an extra slice of the collateral as a reward to whoever closes the position.
Nobody calls you first, as a bank might. The smart contract follows its rules as soon as the conditions are met.
Everything in Myntkaup Learn is written and regularly reviewed by the Myntkaup editorial team. It is for education and is not investment advice. Editorial policy. Updated 18 October 2026.