Collateral Arrangements

Definition ∞ Collateral arrangements pertain to the practice of pledging assets as security against a loan or other financial obligation. In the digital asset sector, this typically involves locking cryptocurrencies or other virtual assets within a smart contract to secure a decentralized finance loan. These arrangements serve to reduce lender risk by providing recourse in the event of borrower default.
Context ∞ The inherent price volatility of digital assets often necessitates over-collateralization in these arrangements to safeguard against market fluctuations. Ongoing discussions in crypto news frequently address the efficiency of liquidation processes and the reliability of price oracles that underpin these systems. Regulatory bodies are also examining the legal treatment of digital collateral within existing financial frameworks.