Rehypothecation loops describe a financial practice where collateral pledged by one party for a loan is subsequently used as collateral by the lender for their own borrowing. This process can be repeated across multiple transactions, creating chains of interconnected debt. While it can enhance capital efficiency, it significantly amplifies systemic risk. Such practices can lead to rapid deleveraging during market stress.
Context
In decentralized finance, rehypothecation loops pose a considerable risk, frequently discussed in the context of cascading liquidations. News reports sometimes analyze how these interconnected collateral arrangements can exacerbate market downturns. The transparency of blockchain data allows for better tracking of these exposures, but the underlying risks remain a concern for DeFi stability.
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