What Is Collateral?

Collateral is something of value that individuals pledge in order to receive a loan. The lender can use it to reduce the risk of the borrower not paying them back. However, if the value of the collateral considerably decreases compared to the borrowed asset, the borrower may face liquidation, where their collateral is sold to cover the cost of the borrowed assets.

Individuals typically come across collateral requirements on cryptocurrency exchanges when Margin trading, or on decentralised lending platforms.

Key Takeaway

Collateral refers to assets pledged in order to obtain a loan. A lender requires collateral in order to reduce the risk of a borrower not paying them back.

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