Definition ∞ A Collateral System refers to the framework within decentralized finance (DeFi) protocols where users provide digital assets as security to borrow other assets or to maintain a position. This system dictates the types of assets accepted as collateral, the collateralization ratios required, and the liquidation mechanisms if collateral value drops below a threshold. Its primary function is to secure loans and ensure solvency within the protocol. Robust systems are vital for maintaining financial stability in volatile markets.
Context ∞ The integrity of Collateral Systems is a constant focus in crypto news, especially during periods of market volatility or protocol exploits. Debates often center on optimal collateral ratios, the diversity of accepted collateral, and the efficiency of liquidation processes. Understanding the specifics of a protocol’s collateral system is crucial for evaluating its risk profile and resilience against market shocks.
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