Collateral Systems involve the use of assets pledged by a borrower to a lender as security for a loan. Should the borrower fail to meet repayment obligations, the lender has the right to claim these assets. These systems mitigate credit risk, allowing for greater access to financing and more favorable lending terms. The value and liquidity of the collateral are primary considerations within such arrangements.
Context
In decentralized finance (DeFi), collateral systems are fundamental to lending protocols and stablecoin issuance, often using digital assets as security. News reports frequently discuss the volatility of crypto collateral and the mechanisms, like liquidation thresholds, designed to manage associated risks. The effectiveness and resilience of these automated collateral systems are central to the stability and continued expansion of the DeFi ecosystem.
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