“Cash collateralization” is like a cash reserve requirement of a borrower to ensure that they will be able to repay the lender.
In markets like mortgages, the collateral is usually the house itself–if one fails to make ones’ mortgage payments then the bank will foreclose and seize the house. If one rents a canoe, for instance, the canoe owner will often ask for the renters’ drivers license as collateral in case the renter does not return with the boat. In those cases, there is no cash collateral but instead a physical product as collateral.
Cash collateralization, in contrast, is the requirement to keep cash in escrow for the purposes of repayment. In a 100% cash collateralized system, that means that one must place 100% of the maximum repayment obligation in a secured account to guarantee repayment. For instance, suppose one borrows $600 to buy 1000 contracts in binary options (which redeem to either $1000 or $0) with no interest. A 100% cash collateralized system would mean that you have to put $600 in cash in an account to guarantee the ability to pay in case the value goes to zero.
100% cash collateralization is not always ideal. For example, consider someone who wishes to buy a $100 contract that pays out either $105 or $95 with exactly 50% probability. It is entirely unnecessary to have to put away $100 in cash in an account, since the maximum loss you could have is $5! Normally it is not quite so clean. If one is buying an index on the entire stock market, it is technically possible, though astronomically unlikely, that the value of that index falls to zero. As a result, lenders must make complex calculations about their loss tolerance (e.g. they may set a rule that the cash collateral must cover a 20% fall in the value of the index) that covers enough scenarios that the risk of non-repayment is low, but not be too overburdensome that few people wish to borrow.