Over-collateralization refers to the practice of securing a loan or financial position with collateral that exceeds the value of the borrowed amount. In this setup, borrowers must provide assets worth more than what they are borrowing, which acts as a cushion against market volatility and default risk.For instance, if someone wants to borrow $100 worth of a stablecoin, they might need to provide $150 worth of cryptocurrency as collateral. This extra value helps protect lenders in case the collateral’s price decreases. If the value drops below a certain threshold, the borrower risks liquidation, where their collateral can be sold off to cover the loan.Over-collateralization is common in decentralized finance (DeFi) platforms, where traditional credit checks are bypassed. This method ensures a level of security for lenders, promoting trust in an environment where regulation may be lacking. While it can limit accessibility for some borrowers, it aims to maintain stability within lending systems.