Collateralized Transaction

Definition ∞ A collateralized transaction involves pledging an asset as security to obtain a loan or facilitate another financial operation. Should the borrower default on their obligations, the lender may claim the pledged asset. This mechanism reduces counterparty risk by providing recourse for the lender. Collateralization is a standard practice in traditional finance and decentralized finance alike, securing various lending and borrowing activities.
Context ∞ Collateralized transactions are a foundational element in decentralized finance (DeFi), underpinning lending platforms, stablecoins, and derivatives. Key discussions often relate to collateral ratios, liquidation mechanisms, and the volatility of crypto assets used as security. Observing news about liquidations or changes in DeFi protocol parameters offers current insight into the stability and risk management of these transactions.