Collateral Mispricing

Definition ∞ Collateral mispricing occurs when the value attributed to an asset used as security in a decentralized finance protocol does not accurately reflect its true market value. This discrepancy can result from oracle failures, market manipulation, or severe liquidity constraints. Such an event jeopardizes the stability of lending protocols by enabling borrowers to undercollateralize positions or lenders to liquidate at incorrect valuations. It directly compromises the integrity of collateralized debt positions within DeFi.
Context ∞ The problem of collateral mispricing stands as a critical concern for the operational robustness of decentralized lending platforms and stablecoin systems. Discussions frequently center on the reliability of oracle networks and the imperative for robust, decentralized data feeds to prevent price manipulation. Ongoing innovation focuses on implementing multiple oracle sources and time-weighted average prices to mitigate this significant systemic vulnerability.