Overcollateralization
A requirement for borrowers to deposit collateral worth more than the loan amount to mitigate risk.
What is Overcollateralization?
Overcollateralization ensures that the value of collateral exceeds the borrowed amount, typically by 150–200%, to protect lenders against price volatility in digital assets. For example, borrowing $1,000 USDC on Compound might require $1,600 in ETH at a 62.5% LTV ratio. If collateral value falls, automated liquidations repay the loan, maintaining protocol solvency. Introduced by MakerDAO in 2017, this mechanism is foundational to DeFi lending.
In 2025, average overcollateralization ratios across protocols like Aave and MakerDAO hover around 160%, balancing accessibility and security. Advanced protocols now support dynamic collateral requirements, adjusting based on asset volatility. For instance, during 2024’s market dip, overcollateralized loans prevented systemic losses, with $2 billion in collateral liquidated efficiently across major platforms.
Related Terms
Consensus Algorithm
A consensus algorithm is a mechanism used by a blockchain network to achieve agreement among nodes on the validity and order of transactions in a decentralized system.
Meme on Solana
Humorous digital assets on the Solana blockchain, often inspired by internet memes, leveraging low fees and high speed for rapid launches and trading.
Leverage Ratio (MSTR)
A measure of debt relative to assets or equity, in Strategy's case (Debt + Preferred)/Market Cap.
Capital Inefficiency
The underutilization of provided liquidity in DeFi protocols, where most capital remains idle across unused price ranges.
Consensus Layer
The protocol layer responsible for achieving agreement among nodes on the state of a blockchain network.
Current Mid-market Price
The midpoint between the highest bid and lowest ask prices in the order book.