Bad Debt

Definition ∞ Bad debt in digital asset markets represents unrecoverable loans or credit extensions within decentralized finance protocols. This occurs when collateral values drop below a liquidation threshold, yet the collateral cannot be sold to cover the outstanding loan amount. Such situations often arise during periods of extreme market volatility or due to oracle failures providing incorrect price feeds. It signifies a loss for the lender or protocol, impacting overall solvency and liquidity.
Context ∞ The ongoing discussion surrounding bad debt centers on protocol risk management strategies and the robustness of liquidation mechanisms in volatile market conditions. Future developments aim to enhance oracle reliability and implement more sophisticated collateral management systems to mitigate the accumulation of unrecoverable liabilities within DeFi ecosystems.