Asset re-hypothecation is when a financial institution reuses a client’s collateral for its own borrowing or trading activities. This practice permits the institution to lend out assets that clients have pledged as security for loans or other transactions. It effectively multiplies the utility of the original collateral within the financial system.
Context
In traditional finance, asset re-hypothecation introduces systemic risk by increasing interconnectedness among financial entities. Within digital asset markets, concerns arise regarding the potential for similar practices by centralized crypto lenders or exchanges. Debates address whether such actions introduce hidden leverage and counterparty risk, particularly during market volatility.
The volatility tranching model abstracts risk, transforming staked collateral yield into a subsidy for fee-free leveraged trading, optimizing capital efficiency.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
