Collateral overvaluation describes a circumstance where assets pledged as security for a loan or financial position are assigned a value higher than their actual market worth. This discrepancy can occur due to inaccurate pricing mechanisms, market manipulation, or rapid asset depreciation that outpaces valuation updates. In decentralized finance, collateral overvaluation significantly increases risk for lenders, as the security might not cover the loan amount if liquidation becomes necessary. It presents a critical vulnerability within lending protocols.
Context
Collateral overvaluation remains a persistent concern within decentralized finance lending protocols, particularly during periods of high market volatility. A critical discussion point involves the reliability of oracle networks that provide real-time price feeds for collateral assets. Ongoing efforts aim to develop more robust and decentralized valuation methods to mitigate the risks associated with inflated collateral assessments.
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