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Collateralisation Meaning

Collateralisation is the process of using an asset as security to obtain a loan or unlock additional financial capacity. It describes the mechanism by which assets are pledged, locked, or escrowed to back borrowing, trading, or other financial activities.

In crypto markets, collateralisation is most commonly associated with DeFi lending protocols, where users deposit cryptocurrencies into smart contracts to borrow other assets. Because blockchains lack centralized credit checks, collateralisation replaces trust with code-ensuring loans are backed by verifiable, on-chain assets.

Collateralisation ratios define how much can be borrowed relative to the collateral’s value. For example, a 150% collateralisation ratio means a user must lock $150 worth of crypto to borrow $100.

If the collateral’s value declines and breaches a liquidation threshold, the protocol automatically liquidates part or all of the collateral to maintain solvency. Collateralisation is also central to margin trading, where traders pledge assets to borrow funds and increase position size.

While this amplifies potential gains, it also increases risk, as adverse price movements can trigger rapid liquidation. Overall, collateralisation enables capital efficiency while enforcing strict risk controls-making it a foundational concept in both traditional and crypto financial systems.

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Important Disclaimer:

Finery Markets BVI Limited (“Finery Markets”) provides software, technology infrastructure, and related Information and Communication Technology (ICT) services on a Software-as-a-Service (“SaaS”) basis. Finery Markets acts solely as a software vendor and does not operate a trading platform, does not intermediate, match, execute, clear, or settle transactions, and does not engage in any activities that would require regulatory authorisation under applicable laws.

Finery Markets’ software is non-custodial and is provided exclusively to licensed institutional entities that act as independent operators of their own environments. All counterparties are solely responsible for establishing and maintaining their own bilateral trading and settlement relationships. Finery Markets is not a party to any such arrangements and assumes no responsibility for the conduct, verification, or compliance obligations of any users of the software.

Nothing on this website shall be construed as a financial promotion, investment advice, or an offer to engage in regulated activities. Access to and use of the software is strictly limited to clients who have entered into a software licensing agreement with Finery Markets. Persons located in jurisdictions where such access is restricted should not rely on this website or any of its contents.

Additional notice to UK visitors: This website and associated communications are not intended to constitute a financial promotion under The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) and related guidance. Access to services provided by Finery Markets is limited to regulated entities, professional clients and eligible counterparties as set out by the Financial Conduct Authority. UK users are not permitted to use this website for the services of Finery Markets if they don't fall within these categories.