What is Overcollateralization? Overcollateralization is used to define the situation where an asset (or assets) value used as collateral on a loan exceeds the loan value. It is commonly used by borrowers to reduce credit risk for the creditor and enhance the loan's credit rating.
What does it mean overcollateralization?
What Is Over-Collateralization? Over-collateralization (OC) is the provision of collateral that is worth more than enough to cover potential losses in cases of default. For example, a business owner seeking a loan could offer property or equipment worth 10% or 20% more than the amount being borrowed.
What does collateralized mean?
collateralized; collateralizing. transitive verb. : to make (a loan) secure with collateral. : to use (something, such as securities) for collateral.
Why are DeFi loans overcollateralized?
Over-collateralized loans are how DeFi lending and borrowing is done. In protocols like Maker, Compound, Aave and more, over-collateralization is the norm. Users must provide more capital than they are borrowing in order to take a loan.