Secured Financing

Definition ∞ Secured financing involves loans where a borrower pledges collateral, typically digital assets, to mitigate lender risk. This type of financing is prevalent in both centralized and decentralized crypto lending markets, where assets like Bitcoin or Ethereum are locked as security for a loan. The collateral provides recourse for the lender if the borrower defaults, making these loans less risky than unsecured alternatives. Smart contracts often automate the collateral management and liquidation processes in decentralized protocols.
Context ∞ Secured financing remains a prominent lending model within the digital asset economy, attracting both individual and institutional participants. Discussions frequently address the volatility of digital collateral, which necessitates over-collateralization and dynamic liquidation mechanisms. Regulatory bodies are scrutinizing these lending products, particularly concerning investor protection and the legal enforceability of collateral agreements. Future developments aim to introduce more sophisticated risk management tools and standardized legal frameworks for secured digital asset loans.