How Crypto WorksA VISUAL FIELD GUIDESearch
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ROUTE 03 / Start here

I borrow against collateral

Watch collateral, debt, prices, and liquidation interact.

6 ideasAbout 30 minutesRead in order, or choose a step

Collateralized borrowing creates two simultaneous positions: an asset exposed to market prices and a debt that must be repaid. The available borrowing amount is not a safe zone that remains fixed. Follow how changing prices and accruing interest alter the position.

  1. 01

    DeFi lending

    Locate the supplied assets

    Lenders provide the liquidity that borrowers draw from; depositors also depend on repayment and pool liquidity.

  2. 02

    Collateral and borrowing capacity

    Understand the pledge

    Collateral constrains withdrawal and can be sold under the protocol’s rules.

  3. 03
  4. 04

    Utilization and interest rates

    Let time pass

    Debt can grow even if the borrower takes no further action. Rates may change with utilization.

  5. 05

    Oracles and outside information

    Introduce a price

    The protocol acts on an oracle price, which may differ from the price the collateral can actually fetch.

  6. 06

    Liquidation and bad debt

    Follow repayment and seizure

    A liquidator repays eligible debt and receives collateral. Severe shortfalls can remain.

CHECK YOUR UNDERSTANDING

Does liquidation always prevent insolvency?

Reveal the explanation

No. Liquidation is a mechanism for reducing risky debt. A price gap, illiquid collateral, stale prices, or execution constraints may leave debt greater than recoverable assets.

Another route through the ecosystemI provide liquidity →