Overcollateralization occurs when an asset’s value used as collateral exceeds the amount being borrowed. In the context of lending platforms or decentralized finance (DeFi), this means users must provide collateral that is worth more than the loan they wish to take out. For example, if someone wants to borrow $100 worth of a stablecoin, they might need to deposit $150 worth of cryptocurrency as collateral. This practice helps mitigate the risk of default. If the borrower fails to repay, the lender can liquidate the collateral to recover the loan amount and associated losses.Overcollateralization is crucial for maintaining system stability and ensuring that loans can be secured without relying on credit scores or personal trust. It helps prevent defaults during market volatility, where asset values may drop suddenly. However, it also means that borrowers need to manage their assets carefully since locking up more value than needed can lead to inefficiencies in capital use.