Definition ∞ Collateral risk refers to the potential for loss associated with assets pledged as security for a loan or financial position. In decentralized finance (DeFi), this typically involves digital assets used to back loans or maintain positions in protocols. Fluctuations in the value of the collateral asset can lead to liquidation if its worth falls below a certain threshold. Managing this risk is crucial for both borrowers and lending protocols.
Context ∞ News often highlights instances of collateral risk materializing during periods of high market volatility, leading to significant liquidations across DeFi platforms. Debates center on optimal collateralization ratios, oracle reliability, and the design of liquidation mechanisms. Understanding collateral risk is essential for participants in decentralized lending and borrowing ecosystems.
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