Overcollateralized debt in digital asset finance refers to a loan where the value of the collateral provided by the borrower significantly exceeds the value of the loan received. This excess collateral acts as a safety buffer for the lender against price volatility of the underlying assets. It is a common practice in decentralized finance lending protocols to mitigate risk. This structure helps ensure loan repayment even during market downturns.
Context
Overcollateralization is a fundamental risk management strategy within decentralized lending platforms, offering a degree of security that traditional finance often requires through credit checks. News frequently reports on the collateral ratios maintained by various DeFi protocols and how market volatility can impact liquidation thresholds. Understanding overcollateralized debt is vital for assessing the stability of decentralized financial systems.
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