Since DeFi protocols can't perform credit checks or assess the credit worthiness of borrowers using the same tools of traditional finance, they typically rely on loan over-collateralization to ensure that lenders will be able to receive their funds back. When borrowers' outstanding loan balances exceed their loan collateral value, they are "liquidated" by third parties that swoop in, repay the loan, and make a profit. In today's post, I'll explain why overcollateralized loans are essential to DeFi, how over-collateralized loans work, and how liquidations function.
References
https://www.investopedia.com/
https://zengo.com/understanding-compounds-liquidation/#Compounds_Liquidation
https://medium.com/defi-saver/liquidations-in-defi-how-they-happen-and-how-to-prevent-them-9caddd52de71
