Crypto glossary
Undercollateralized loan
An undercollateralized loan lends more than the collateral posted, relying on credit assessment, reputation or legal agreements instead of locked crypto.
Almost all DeFi borrowing is overcollateralized: users lock more value than they take out. Undercollateralized loans break that rule. A borrower receives funds backed partly or entirely by its creditworthiness, an off-chain legal contract or real-world assets. On-chain credit protocols such as Maple, Goldfinch and Clearpool pool lender deposits and route them to vetted institutions, trading firms or businesses.
This is where DeFi meets traditional credit. Undercollateralized lending unlocks capital efficiency that overcollateralized markets cannot offer, and it is the basis of most on-chain private credit and many real-world asset strategies. Lenders earn higher yields in exchange for taking credit risk rather than only smart contract risk.
Defaults are the central danger. Several crypto trading firms that borrowed without full collateral failed in 2022, leaving lenders with heavy losses and long recovery processes. Outcomes depend on underwriting quality, legal enforceability and transparency, which are harder to verify than code. Flash loans are sometimes described as uncollateralized, but they must be repaid in the same transaction, so they carry no credit risk.
Example
A market maker borrows 5 million USDC from an on-chain credit pool after passing due diligence and signing a loan agreement, posting only 20% of the amount as collateral.