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What is collateral in crypto?
Collateral is crypto you lock up to secure a loan or a leveraged trade. If you do not repay, or its value falls too far, the lender or protocol can take it. DeFi loans usually require collateral worth more than the amount borrowed.
What it means for you
Your collateral can be sold without asking you once its value drops below the required level, even if the price recovers an hour later. Locked collateral also cannot be sold or moved by you until the loan is repaid. Check the ratio at which liquidation starts and how fast your collateral's price usually moves.
How it works
A lending contract values your collateral with an oracle price feed and applies two limits: a loan-to-value ratio caps how much you can borrow against it, and a liquidation threshold marks where the position can be liquidated. Loans are over-collateralized, so the collateral must exceed the amount borrowed. If the collateral's price falls, the health factor falls with it, and nothing waits for the price to recover. The ECB notes that forced liquidations in a downturn can push prices down further, which can push more collateral into liquidation.
Sources: ethereum.org: Decentralized finance (DeFi), Aave documentation, ethereum.org: Oracles, ECB Macroprudential Bulletin: Decentralised finance · checked 4 October 2026
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