Pool Insolvency

Definition ∞ Pool insolvency means a DeFi pool lacks sufficient assets to meet its user obligations. This condition arises within a decentralized finance liquidity or lending pool when its total asset value falls below its aggregate liabilities to depositors. Causes include successful exploits that drain funds, accumulation of unrecoverable bad debts, or severe market contractions that diminish the collateral’s worth. Such a state jeopardizes user funds and undermines protocol stability.
Context ∞ News reports occasionally cover incidents of pool insolvency in DeFi, prompting urgent discussions about risk management, collateralization ratios, and protocol security. The industry is actively working on solutions like improved liquidation mechanisms and insurance protocols to prevent and mitigate such occurrences. Regulatory bodies are also examining the systemic risks associated with these scenarios.