What is collateral?

Collateral is a financial concept that means something you put up as a guarantee when borrowing money. If you can’t pay back your loan, your collateral will be used to pay your debt. An easy example is when you take a house loan from a bank, the house you bought will be the collateral; if you can’t pay back your loan, the bank will take your house.

It is exactly the same in DeFi; if you want to borrow or mint assets from the protocol, you will need to give the protocol some other assets as collateral. If you don’t pay back your loan or asset position, the protocol will not give you back your collateral.

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