Introduction:
In the Cardano blockchain, collateral refers to a mechanism designed to ensure the secure execution of smart contracts. When you interact with a smart contract, a small amount of ADA (usually between 5–10 ADA) is temporarily locked in your wallet as collateral. This collateral safeguards the network by covering any potential costs incurred if the smart contract fails during execution.
Important Note:
Do not confuse Cardano wallet collateral with NFT loan collateral. While both involve locking assets, they serve entirely different purposes. Wallet collateral ensures the secure execution of smart contracts, whereas NFT loan collateral is used in decentralized finance (DeFi) to back loans. Always verify the context in which the term is used.
How Does Collateral Work?
Cardano employs a two-phase validation process for transactions involving smart contracts:
Phase One: The transaction is checked for correct construction and the ability to pay its processing fee.
Phase Two: The smart contract scripts within the transaction are executed.
If the transaction passes the first phase but fails during script execution in the second phase, the collateral is collected to compensate for the resources used by the network. This ensures that nodes are rewarded for their work, even if a smart contract fails.
Why Is Collateral Important?
Without a collateral mechanism, malicious actors could exploit the system by submitting numerous invalid transactions, leading to a Denial of Service (DoS) attack. By requiring collateral, Cardano makes such attacks costly, as attackers would need to lock significant amounts of ADA, deterring misuse and protecting the network's integrity.
FAQs About Collateral
How Much Collateral Is Required?
Typically, wallets require 5–10 ADA to be set as collateral. This amount is temporarily locked and does not affect your main wallet balance.
Can I Retrieve My Collateral?
Yes, you can unlock and retrieve your collateral at any time by disabling the collateral setting in your wallet.
Is Collateral a Fee?
No, collateral is not a fee. It's a safeguard, and you get the ADA back unless your transaction fails due to invalid or malicious activity.
Do All Transactions Require Collateral?
No, collateral is only required for transactions involving smart contracts. Regular transactions, such as sending or receiving ADA, do not need collateral.
What’s Next?
Now that you understand collateral, explore these related topics to deepen your knowledge of Cardano’s ecosystem:
