Under-Collateralization
Also known as: Low Collateral Loan, Undercollateralized Lending, Unsecured DeFi Loan
A lending condition where the collateral value is lower than the loan value, introducing higher risk.
Under-collateralization occurs when a borrower secures a loan with less collateral than the loan amount. In traditional finance, it's common, but in DeFi, it represents a riskier strategy that typically requires trusted relationships, credit scoring, or off-chain enforcement. Some DeFi protocols explore under-collateralized lending using on-chain reputation, real-world assets, or hybrid models. This contrasts with overcollateralization, where loans require more collateral than borrowed. Under-collateralized lending expands access but increases counterparty and default risks.