Mutations in the TNF family ligand EDA1 cause X-linked hypohidrotic ectodermal dysplasia (XLHED), a condition characterized by defective development of skin appendages. The EDA1 protein displays a proteolytic processing site responsible for its conversion to a soluble form, a collagen domain, and a trimeric TNF homology domain (THD) that binds the receptor EDAR. In-frame deletions in the collagen domain reduced the thermal stability of EDA1. Removal of the collagen domain decreased its activity about 100-fold, as measured with natural and engineered EDA1-responsive cell lines. The collagen domain could be functionally replaced by multimerization domains or by cross-linking antibodies, suggesting that it functions as an oligomerization unit. Surprisingly, mature soluble EDA1 containing the collagen domain was poorly active when administered in newborn, EDA-deficient (Tabby) mice. This was due to a short stretch of basic amino acids located at the N terminus of the collagen domain that confers EDA1 with proteoglycan binding ability. In contrast to wild-type EDA1, EDA1 with mutations in this basic sequence was a potent inducer of tail hair development in vivo. Thus, the collagen domain activates EDA1 by multimerization, whereas the proteoglycan-binding domain may restrict the distribution of endogeneous EDA1 in vivo.