Over-Collateralization
Locking up more value than you borrow — DeFi's substitute for credit checks, and the reason its loans are trustless.
Over-collateralization means posting collateral worth more than the loan itself — borrow $100 by locking $150. Because DeFi protocols can’t assess creditworthiness or pursue defaulters, the excess collateral is the credit system: if you vanish or your collateral falls in value, the protocol liquidates it and stays solvent.
This is why DeFi lending, for all its power, hasn’t replaced ordinary credit — you can’t borrow money you don’t already have collateral for. Its real users are leverage-seekers, shorters, and holders who want liquidity without selling (and triggering a taxable event). Undercollateralized on-chain credit is an active frontier, but it requires reintroducing trust or identity.