Discover how Decentralized Finance (DeFi) impacts the accounting industry, the role of crypto accounting, and the features of dedicated crypto accounting software.
Collateral is an asset used as a guarantee for the repayment of a loan, to be forfeited in case of a default.
In finance, collateral is an asset that a borrower offers as a guarantee to a lender until a loan is repaid. If the borrower defaults, the lender has the right to seize the collateral to recoup their losses. Collateral can be any asset that the lender is willing to accept, from real estate to financial securities, and, in the context of decentralized finance (DeFi), even cryptocurrency. In DeFi platforms, users can lock up their cryptocurrency as collateral to borrow other cryptocurrencies. This is a common practice in crypto lending platforms and is also the basis for creating certain stablecoins.
From an accounting perspective, collateralized loans must be recorded as liabilities, and the collateral itself may need to be reported as an encumbered asset.