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Collateral tokens

In a decentralized finance (DeFi) system, collateral tokens are used to secure or collateralize a loan. Borrowers in DeFi lending protocols often have to offer collateral in the form of additional cryptocurrency tokens in order to obtain a loan.

Collateral tokens guarantee that lenders will be able to reclaim some or all of their investment. This acts as insurance for lenders, because, if the borrower is unable to repay the loan, lenders may confiscate the tokens used as collateral and sell them to recover their losses.