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In this video tutorial, the process of enabling smart contract support in the Nami wallet is explained. Collateral, set at five ADA, serves as a protection in case a smart contract fails, limiting the amount it can take. This prevents malicious apps from taking more than the set collateral amount. To enable collateral, a balance of at least five ADA is required. To do so, users need to access their Nami wallet extension and follow the provided steps.