Collateral
Assets pledged as security for a loan. In DeFi, you deposit crypto collateral to borrow other assets.
DeFi lending is over-collateralized, meaning you need to deposit more than you borrow. If you want to borrow $1,000 in USDC, you might need to deposit $1,500 worth of ETH as collateral. This protects lenders if the collateral's value drops.
The collateral ratio varies by protocol and asset. Volatile assets require higher collateral ratios. If your collateral's value drops below the required ratio, your position gets liquidated, meaning the protocol sells your collateral to repay the loan.
USDC is commonly used on both sides of DeFi lending. You can deposit USDC as collateral (with low liquidation risk since its price is stable), or borrow USDC against volatile crypto assets.
Related Terms
Liquidation
The forced sale of collateral when a borrower's collateral value drops below the required minimum ratio.
Lending Protocol
A DeFi application that lets users lend crypto to earn interest and borrow crypto against collateral.
DeFi (Decentralized Finance)
Financial services built on blockchain smart contracts that operate without traditional intermediaries like banks.
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This definition is provided for educational purposes. USDC.org is an independent resource and is not affiliated with Circle Internet Financial.