Collateral efficiency measures how effectively an asset used as security supports a loan or other financial position within decentralized finance. It refers to the ratio of borrowed value to the value of the collateral provided. Higher efficiency means a smaller amount of collateral is needed to secure a given loan. This metric is vital for optimizing capital use in lending protocols.
Context
In DeFi lending, collateral efficiency is a critical factor for both borrowers and lenders, affecting risk management and capital allocation. Protocols strive to improve this efficiency through various mechanisms, including dynamic collateral ratios or novel risk assessment models. The pursuit of greater collateral efficiency aims to maximize utility of assets while maintaining system stability.
Integrating L2 settlement rails with correspondent banking accelerates capital mobility and significantly reduces systemic counterparty risk for global finance.
The volatility tranching model abstracts risk, transforming staked collateral yield into a subsidy for fee-free leveraged trading, optimizing capital efficiency.
The FAssets protocol unlocks dormant XRP capital for DeFi yield generation, utilizing a Core Vault to optimize collateral efficiency and drive network TVL.
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