4.3.0. Collateral – Four Important Points
Collateral is the digital asset that the borrower pledges and deposits with the Lending Platform as a guarantee that the crypto loan is going to be repaid.
The following are four important points about crypto collateral you should know if you are planning to obtain a crypto loan:
(1). Crypto-based
Collaterals for crypto lending are paid in cryptos and not in fiat currencies.
(2). Return
A collateral is returned upon full repayment of the loan.
(3). Stability
Since the prices of cryptocurrencies fluctuate a lot, your crypto collateral will fluctuate with the market movements. To avoid much price fluctuations, many people use stablecoins as their collateral.
Because they are backed by fiat currencies such as the USD or a commodity such as gold, stablecoins are often stable in price, hence, good assets for collateral.
(4). Threshold Limit
The Threshold Limit is the minimum amount of collateral that is required for a crypto loan.
When the price value of your collateral is approaching the loan threshold, most lending platforms have a system in which you will automatically be alerted either to add more asset to your collateral or risk part of the collateral being sold off to bring it back to the threshold limit.
To avoid undue tampering with the collateral, many lending platforms have structured how much percentage of a collateral that should be tied to a certain amount of the loan. For example, you may not be allowed to borrow an amount that is more than 75% of your collateral.