Over-Collateralization Mechanics

Over-collateralization mechanics involve requiring borrowers to deposit assets worth significantly more than the value they are borrowing. This provides a safety buffer that ensures the protocol can cover the debt even if the value of the collateral asset drops.

If the collateral value decreases, the protocol can sell it to repay the loan, protecting the lender. This is the primary method used by decentralized lending platforms to manage risk without a centralized credit check.

The required ratio is determined by the volatility of the asset. This approach is fundamental to the stability of decentralized credit markets.