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Collateralization

The term collateralization refers to the process of using one asset as insurance while leading out another one. This is a fairly common practice for leading out a large asset that puts the lender at risk, in case the borrower defaults on the loan amount.

Several crypto lending platforms also practice collateralization, while accepting tokens in order to lead out a different one. Since cryptocurrencies in themselves are subjected to volatility, crypto lenders prefer stablecoins to further mitigate the risk.

Since Stablecoins are directly pegged to a fiat currency, there isnโ€™t any drastic change in price. Some of the popular examples include USDT and USDC. Another choice thatโ€™s gradually surfacing includes the use of collateral tokens. These crypto coins are specifically designed to serve as collaterals.


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