Definition ∞ Negligible collateral refers to a situation in lending or borrowing where the value of assets pledged as security is minimal or insufficient relative to the loan amount. This condition often introduces higher risk for the lender, as the collateral may not adequately cover potential losses if the borrower defaults. In decentralized finance, loans with negligible collateral typically rely on reputation, flash loans, or other mechanisms that do not require substantial asset backing. It indicates a low-security backing for a financial obligation.
Context ∞ In decentralized finance (DeFi), the concept of negligible collateral is frequently discussed in news concerning undercollateralized loans and novel lending protocols. While traditional finance demands significant collateral, some DeFi innovations aim to reduce this requirement, often through uncollateralized lending pools or reputation-based systems. The debate centers on the associated risks and the potential for these models to scale while maintaining financial stability.
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