Collateral Valuation Flaw

Definition ∞ A collateral valuation flaw describes a deficiency in how the worth of assets used as security in a financial agreement is determined. This defect can lead to incorrect risk assessments, over-collateralization requirements, or insufficient backing for loans. Such errors can arise from unreliable price feeds, illiquid assets, or sudden market downturns. These flaws pose substantial risks to decentralized lending protocols.
Context ∞ The accuracy of collateral valuation is a constant concern within decentralized finance, especially during periods of high market volatility. News frequently reports on instances where oracle failures or rapid price drops expose vulnerabilities in lending platforms. Rectifying collateral valuation flaws through improved oracle mechanisms and robust risk models is a continuous effort.