Definition ∞ A borrowing protocol allows users to obtain digital asset loans by supplying collateral, often without traditional intermediaries. These decentralized finance (DeFi) applications enable peer-to-peer or pooled lending and borrowing, governed by smart contracts that establish terms such as interest rates and collateral requirements. Users typically deposit cryptocurrency as collateral to borrow other digital assets, with the collateral being liquidated if its value falls below a certain threshold. Such protocols facilitate capital efficiency within the digital asset ecosystem.
Context ∞ Borrowing protocols constitute a fundamental layer of the DeFi landscape, enabling various financial activities like leveraged trading and yield generation. Regulatory scrutiny often addresses the lack of traditional Know Your Customer (KYC) procedures and the potential for systemic risk if large-scale liquidations occur during market downturns. Ongoing advancements focus on improving capital efficiency, diversifying collateral options, and integrating more sophisticated risk management models.
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