What is Collateral?

Collateral is the asset you lock to back a loan or a leveraged position. In DeFi lending you deposit ETH or a stablecoin to borrow against it; on a perp venue the margin you post is collateral for the position; in a collateralized stablecoin the reserve is collateral for the token. The lender's protection is that if the loan goes bad, the collateral is sold.

The number that governs everything is the ratio between collateral value and debt. Lending protocols set a maximum loan-to-value per asset and a liquidation threshold above it; when falling prices push the ratio past the threshold, liquidators repay part of the debt and take collateral at a discount. The health factor shown on a lending dashboard is this ratio in disguise.

Volatile collateral is where it goes wrong. A loan that looked safe at fifty percent loan-to-value can be liquidated after a thirty percent drop, and drops of that size happen in hours. Correlated collateral makes it worse: borrowing a stablecoin against ETH to buy more ETH is leverage with a lending market as the venue.

Collateral also stops being available. Locked in a protocol, it cannot be sold in a crash without first repaying the debt, and an asset used as collateral on one venue cannot back a position on another. A portfolio can look large and be mostly spoken for.

A tracker has to show collateral as what it is: an asset you own, minus the debt against it, with the liquidation distance attached. TrueHold reads lending positions with their health factor and rates, shows perp collateral with liquidation distance, and counts the net position into the total rather than the gross.

Overcollateralisation is also why DeFi lending is capital-inefficient by design: locking two dollars to borrow one is the price of a loan with no credit check and no counterparty who knows your name. That trade-off, not the interest rate, is the real cost of on-chain borrowing.