Description: Overcollateralization is the practice of securing a loan with collateral that exceeds the loan’s value. In the context of decentralized finance (DeFi), this strategy is used to mitigate the risk of default and the inherent volatility of digital assets. By requiring borrowers to provide collateral that surpasses the loan amount, DeFi protocols can protect themselves against sharp fluctuations in asset values. This is particularly relevant in the blockchain ecosystem, where cryptocurrency prices can be extremely volatile. Overcollateralization also allows lenders to have greater security, as, in the event that the collateral’s value drops, there is still a safety margin that can be liquidated to recover the loan. Overcollateralization has become a common practice to facilitate loans and ensure the stability of the decentralized financial system across various platforms. In the realm of Web3 and Bitcoin, overcollateralization presents an innovative solution to foster trust among parties involved in financial transactions, promoting a more robust and secure ecosystem.
