Definition ∞ Credit risk represents the possibility of loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. In the context of digital assets and decentralized finance, this refers to the risk that a counterparty in a lending or borrowing protocol will default on their debt. It applies to both traditional and digital lending environments where one party extends credit to another. This risk is a primary consideration for lenders and investors when assessing potential financial exposures.
Context ∞ Within decentralized finance, managing credit risk is a significant challenge, particularly in uncollateralized lending protocols. The absence of traditional credit scoring mechanisms necessitates innovative approaches, such as reputation-based systems or on-chain analytics, to assess borrower reliability. Regulatory bodies are examining how to mitigate systemic credit risk in these novel financial structures without hindering innovation.
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