Definition ∞ Decentralized collateral involves assets held and managed by smart contracts or distributed protocols, rather than a central entity. These assets secure loans or other financial positions within a decentralized finance system. Their custody and release are governed by code, ensuring transparency and removing intermediaries. This mechanism is a foundational element of many stablecoins and lending platforms.
Context ∞ The discussion around decentralized collateral frequently highlights its role in reducing counterparty risk and enhancing financial autonomy within the DeFi ecosystem. Concerns often relate to volatility and liquidation risks, especially during market downturns, prompting ongoing protocol refinements. Regulators are also closely examining these assets as they consider frameworks for digital finance.
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