Collateral are assets accepted by the lender in the form of security. This ensures that the borrower repays the loan on time, or the collateral ends up covering up the cost of repayments.
The primary reason behind the use of collateral is to significantly reduce the risk taken by the lender. Collaterals ensure lenders, in case the borrower defaults, then don’t end up empty-handed.
In the crypto space, collateralization has gained popularity in the form of collateral tokens. Collateral tokens cater the same purpose as real-world collaterals, i.e. to mitigate the risk of crypto-based lending.