Over-Borrowing

Definition ∞ Over-borrowing describes the act of taking on excessive debt relative to one’s ability to repay or the value of one’s collateral. In decentralized finance, this occurs when users borrow digital assets against collateral with insufficient margin, increasing their liquidation risk. It creates systemic fragility within lending protocols, particularly during periods of market downturns.
Context ∞ Over-borrowing remains a significant risk factor in decentralized lending markets, contributing to liquidation cascades during periods of high volatility. Discussions frequently address the need for more robust risk management tools and clearer collateralization ratios within DeFi protocols. A critical future development involves the implementation of advanced liquidation mechanisms and proactive risk assessment models to prevent widespread over-borrowing and enhance protocol stability.