Non-Fungible Collateral

Definition ∞ Non-fungible collateral refers to unique digital assets, such as NFTs, used as security for loans or other financial instruments within decentralized finance. Unlike fungible tokens which are interchangeable, non-fungible tokens possess distinct characteristics and value, making their use as collateral more complex. Their valuation often requires specialized appraisal mechanisms or peer-to-peer agreements, as market liquidity can be variable. This approach unlocks new forms of value from unique digital items by enabling their utilization in lending markets.
Context ∞ The integration of non-fungible collateral into DeFi protocols is an evolving area, presenting both opportunities for capital efficiency and significant valuation challenges. Discussions frequently concern reliable price discovery mechanisms for unique assets and the liquidation processes for such illiquid collateral. Future advancements will focus on developing more sophisticated oracle solutions for NFT valuation and standardized frameworks for managing the risk associated with non-fungible assets in lending.