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In this video tutorial, Nami explains the importance of collateral in protecting users from potential smart contract failures. Collateral is set at five ADA to ensure that only this amount can be taken to cover any resources used in the event of a smart contract failure. To enable collateral in your Nami wallet, you must have a balance of at least five ADA. This feature prevents malicious dapps and protocols from taking more than the set collateral amount, providing security for users.