Collateralization Model

Definition ∞ A collateralization model defines the rules and assets used to secure a loan or a stablecoin’s peg within decentralized finance. It specifies the type and quantity of digital assets that must be locked as collateral to back another asset or debt. These models are crucial for maintaining solvency and stability in lending protocols and algorithmic stablecoins. They dictate the risk parameters and liquidation thresholds for participants.
Context ∞ In decentralized finance, the effectiveness and security of a collateralization model are paramount for the stability of various protocols. News often focuses on the over-collateralization ratios, acceptable collateral types, and the mechanisms for liquidation during market volatility. Debates frequently involve optimizing these models to balance capital efficiency with robust risk management. Recent market events have highlighted the importance of resilient collateralization strategies.