What is Over-Collateralization (OC)?
Let's find out Over-Collateralization (OC) meaning, definition in crypto, what is Over-Collateralization (OC), and all other detailed facts.
The provision of collateral valued over the amount that is considered to be enough to compensate for possible losses in the event of a default is referred to as over-collateralization. It is used to effectively navigate danger and entails using an asset as collateral on a loan when the asset's worth surpasses the loan's worth.
For instance, a company owner that needs a loan could offer their equipment or property that is valued at 10% or 20% more than the amount being borrowed. Therefore, over-collateralization might be utilized by companies generating bonds for the same reason.
Over-collateralized stablecoins have a big amount of cryptocurrency tokens kept as a reserve for producing a decreased number of stablecoins. This provides a sort of shield against price fluctuations.
Collateralizing stablecoins, as their demand and usage expand, isn't always efficient because collateral that is unproductive could be put to better use elsewhere. Currently, we are witnessing new developments in which stablecoins with algorithmic managers may produce more coins when the price rises and purchase them off the market when the price falls. This algorithmic manipulation of supply to adjust the price eliminates the need for collateral.