Definition ∞ Collateralized lending is a financial practice where a borrower pledges an asset as security for a loan. If the borrower defaults, the lender can seize the collateral to recoup their losses. In the digital asset space, this often involves using cryptocurrencies as collateral to obtain loans in fiat currency or other digital assets. This mechanism is fundamental to many decentralized finance (DeFi) protocols, providing liquidity and enabling leverage.
Context ∞ The current discourse surrounding collateralized lending in crypto focuses on the risk management associated with volatile digital asset collateral and the robustness of liquidation mechanisms. Key debates involve the adequacy of over-collateralization ratios and the potential for systemic risk amplification during market downturns. Future developments to watch include the increasing integration of real-world assets as collateral and the evolution of regulatory frameworks governing decentralized lending platforms.
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