Collateral reuse involves using an asset that has already been pledged as collateral for one loan to secure an additional loan or financial position. This practice allows market participants to maximize the utility of their capital by obtaining further liquidity against the same underlying asset. It functions by creating a chain of pledges, where the initial collateral supports multiple liabilities. The process increases capital efficiency within financial systems.
Context
In decentralized finance, collateral reuse is a prevalent feature in lending protocols, allowing users to leverage their crypto assets more extensively. News reports often cover the risks associated with this practice, particularly during periods of market volatility, as cascading liquidations can occur if asset values decline sharply. A key debate centers on the systemic risk collateral reuse introduces to the broader digital asset ecosystem and the need for robust risk management frameworks.
The new non-consumable financing primitive embeds principal protection into fundraising, setting a precedent for risk-mitigated, yield-funded capital formation.
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