Crypto Collateral

Definition ∞ Crypto collateral refers to digital assets pledged as security for a loan or other financial obligation within decentralized finance or traditional financial settings. These assets are locked in smart contracts or held by custodians to guarantee repayment, reducing lender risk. If the borrower defaults, the collateral can be liquidated to cover the outstanding debt. It enables borrowing without traditional credit checks.
Context ∞ The use of crypto collateral is fundamental to many decentralized finance lending and borrowing protocols, enabling users to access liquidity without selling their digital holdings. News often covers liquidations during market downturns, highlighting the volatility associated with these assets. Regulatory bodies are also examining crypto collateral arrangements, particularly concerning consumer protection and systemic risk. This practice is central to the expansion of digital asset-backed financial services.