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What is Collateral?

Collateral is any asset used as security for a loan. The terms of the arrangement between the lender and the borrower will determine how collateral operates.

Collateral's main purpose is to reduce risk as much as feasible for the lender. By accepting collateral, the lender ensures that even in the event of a default on the loan, they will not be left in the dark. With the advent of collateral tokens, collateralization in cryptocurrencies is quickly gaining popularity. Collateral tokens operate as a risk-mitigation tool for cryptocurrency-based lenders, and their concept is roughly the same as that of traditional financial markets. Collateral tokens are becoming more and more in demand as crypto loans grow in popularity and more individuals use the blockchain to handle their finances.