Debt Absorption

Definition ∞ Debt absorption involves one entity assuming the financial obligations or liabilities of another party. This process often occurs during financial restructuring or in situations where a stronger entity intervenes to stabilize a weaker one. It can be a mechanism for managing credit risk or facilitating mergers and acquisitions. This action directly transfers financial responsibility.
Context ∞ In decentralized finance (DeFi), debt absorption can occur within lending protocols or during liquidity crises, where a protocol or community may take on bad debt to maintain system stability. News reports might discuss instances where a decentralized autonomous organization (DAO) votes to absorb protocol debt to protect user funds. Such events underscore the community-driven risk management approaches within DeFi.