diff --git a/contracts/Collateral.sol b/contracts/Collateral.sol
index 624313c..e3087ce 100644
--- a/contracts/Collateral.sol
+++ b/contracts/Collateral.sol
@@ -44,17 +44,27 @@ contract Collateral {
     assert(token.transfer(msg.sender, amount));
   }
 
+  function _slash(address account, uint256 percentage) internal invariant {
+    uint256 amount = (balanceOf(account) * percentage) / 100;
+    totals.slashed += amount;
+    subtract(account, amount);
+  }
+
   modifier invariant() {
     Totals memory oldTotals = totals;
     _;
     assert(totals.deposited >= oldTotals.deposited);
     assert(totals.withdrawn >= oldTotals.withdrawn);
-    assert(totals.deposited == totals.balance + totals.withdrawn);
+    assert(totals.slashed >= oldTotals.slashed);
+    assert(
+      totals.deposited == totals.balance + totals.withdrawn + totals.slashed
+    );
   }
 
   struct Totals {
     uint256 balance;
     uint256 deposited;
     uint256 withdrawn;
+    uint256 slashed;
   }
 }
diff --git a/contracts/TestCollateral.sol b/contracts/TestCollateral.sol
new file mode 100644
index 0000000..5f5cb4a
--- /dev/null
+++ b/contracts/TestCollateral.sol
@@ -0,0 +1,14 @@
+// SPDX-License-Identifier: MIT
+pragma solidity ^0.8.0;
+
+import "./Collateral.sol";
+
+// exposes internal functions for testing
+contract TestCollateral is Collateral {
+  // solhint-disable-next-line no-empty-blocks
+  constructor(IERC20 token) Collateral(token) {}
+
+  function slash(address account, uint256 percentage) public {
+    _slash(account, percentage);
+  }
+}
diff --git a/test/Collateral.js b/test/Collateral.js
index 1bdaed8..c747a73 100644
--- a/test/Collateral.js
+++ b/test/Collateral.js
@@ -5,7 +5,7 @@ describe("Collateral", function () {
   let account0, account1
 
   beforeEach(async function () {
-    let Collateral = await ethers.getContractFactory("Collateral")
+    let Collateral = await ethers.getContractFactory("TestCollateral")
     let TestToken = await ethers.getContractFactory("TestToken")
     token = await TestToken.deploy()
     collateral = await Collateral.deploy(token.address)
@@ -73,4 +73,20 @@ describe("Collateral", function () {
       expect(after - before).to.equal(balance)
     })
   })
+
+  describe("slashing", function () {
+    beforeEach(async function () {
+      await token.connect(account0).approve(collateral.address, 1000)
+      await token.connect(account1).approve(collateral.address, 1000)
+      await collateral.connect(account0).deposit(1000)
+      await collateral.connect(account1).deposit(1000)
+    })
+
+    it("reduces the amount of collateral by a percentage", async function () {
+      await collateral.slash(account0.address, 10)
+      await collateral.slash(account1.address, 5)
+      expect(await collateral.balanceOf(account0.address)).to.equal(900)
+      expect(await collateral.balanceOf(account1.address)).to.equal(950)
+    })
+  })
 })