Collateralized debt represents a loan secured by specific assets. These assets, known as collateral, are pledged by the borrower to the lender as assurance against default. If the borrower fails to repay the debt according to agreed terms, the lender has the right to seize and liquidate the collateral to recoup their losses. This mechanism is fundamental to credit markets, offering a degree of security for lenders.
Context
Within decentralized finance (DeFi), collateralized debt structures are prevalent, enabling users to borrow digital assets by pledging other cryptocurrencies. The valuation and liquidation thresholds of this collateral are subjects of continuous debate, particularly during periods of extreme market volatility. Regulatory bodies are increasingly examining these structures for potential systemic risks and consumer protection concerns. The stability of stablecoins often relies on the robust management of their underlying collateral.
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