Decentralized Debt refers to financial obligations issued and managed through autonomous smart contracts on a blockchain, without the reliance on traditional intermediaries like banks. These debt instruments are typically overcollateralized with digital assets and operate within decentralized finance (DeFi) protocols. Borrowers obtain loans by locking up collateral, and lenders provide liquidity in exchange for interest. The terms of the debt are transparently coded on the blockchain.
Context
The expansion of Decentralized Debt markets is a key driver of innovation within the DeFi ecosystem, providing new avenues for capital efficiency and financial inclusion. News reports often highlight the risks associated with smart contract vulnerabilities and the volatility of collateral assets, which can trigger liquidations. Regulatory bodies are currently evaluating how to oversee these permissionless lending and borrowing activities.
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