Skip to main content

Setting Collateral

Why Set Collateral?​

In simple terms, collateral prevents someone from bearing the cost of executing a script on-chain if it fails. Even if the execution fails, CPU and memory are still used, which incurs costs. On the Cardano chain, collateral acts as a safety net: if the execution fails, the collateral covers the expenses. Typically, 2–5 ADA is set as collateral.

Why Not Just Deduct the Transaction Fee?​

Because:

  • On Cardano, transaction fees are only settled when the transaction succeeds.
  • If the transaction validation fails, it never becomes an on-chain transaction.
  • Therefore, there’s no “entry point” to deduct fees.

Collateral is designed as a compensation channel for this mechanism.

Difference from Ethereum​

In Ethereum:

  • Gas is prepaid.
  • Failed transactions still consume Gas.

In Cardano:

  • Transaction fees are only charged on success.
  • Therefore, a separate guarantee mechanism is required for failures.

This is one of the design differences of the UTxO model.

How to Set It Up (Lace Wallet)​

Find the Settings button.

Click to enter.

Find Collateral.

Click to enter. Most wallets set 5 ADA as collateral.

This shows the collateral has been set.