Collateral refers to an asset pledged by a borrower to a lender as security for a loan. In decentralized finance DeFi, digital assets like cryptocurrencies or NFTs frequently serve as collateral, securing loans or positions within various protocols. This mechanism mitigates lender risk by allowing the seizure of the pledged asset if loan terms are not met. The value of this security often exceeds the loan amount to account for market volatility.
Context
The volatility of digital asset markets frequently influences the stability and risk assessment of collateralized lending platforms. Discussions often center on appropriate overcollateralization ratios and the introduction of diverse asset types as acceptable security. Future developments include dynamic collateral management and the integration of real-world assets through tokenization to broaden utility.
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