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This study investigates the systemic risks of over-collateralization using a unique data set of a decentralized lending platform Venus, revealing a significant proportion of borrowers exceeding the required loan-to-value (LTV) range. Employing difference-in-differences, we examine the detrimental effect of an exogenous XVS price crash on borrowers. The results show that the borrowers with a high LTV suffered a greater loss. On the supply side, we introduce the concept of zombie debt, loans near liquidation yet unresolved, revealing distinct short-and long-term risks. The price shock’s impact on zombie debt varies: short-term instances decrease in number while aggregate value rises, hinting at liquidity reduction. Conversely, medium-and long-term cases experience reduced numbers and magnitudes, mitigating supplier losses. Given the higher LTV observed among short-term zombie loans, it is deduced that the price volatility ameliorates the prevalence of zombies characterized by lower LTVs. This research provides a fresh analysis of the credit risk associated with varying degrees of leverage in the context of decentralized lending.∗ Campello: Department of Finance, Cornell University, campello@ cornell. edu. Jin: Department of Economics, National University of Singapore, jin peiyi@ u. nus. edu. Rabetti: Department of Accounting, National University of Singapore, rabetti@ u. nus. edu. Saleh: Department of Finance, Wake Forest University, salehf@ wfu. edu