About the collateral mechanism on Cardano

Collateral is a critical mechanism on Cardano designed to ensure the successful execution of smart contracts. It serves as a monetary guarantee that compensates nodes for their validation work, especially in cases where transaction execution fails.

How does collateral work?

Cardano uses a two-phase validation process:

• Phase 1: The transaction is checked for correctness and ability to cover fees. If it fails here, no scripts are run, the transaction is canceled, and the collateral remains untouched.
• Phase 2: If the transaction passes phase 1, the script is executed. If it fails during this stage, the collateral is used to compensate nodes for their efforts.

Collateral is only used if a transaction fails in phase 2. Otherwise, it stays in your wallet, and successful transactions do not lose collateral.

Why is collateral important?

Collateral helps maintain a secure and efficient environment for decentralized applications (dApps)while protecting the network from potential abuse.

To learn more about collateral, refer to the Cardano Docs.

Updated on: 14/08/2025