Smart Collateral

Definition ∞ Smart collateral refers to digital assets used as security within smart contracts that automatically manage the terms of a loan or financial agreement. Unlike traditional collateral, smart collateral is programmatically locked and released based on predefined conditions coded into a blockchain. This automation removes the need for intermediaries, reducing counterparty risk and transaction costs. If loan conditions are breached, the smart contract can automatically liquidate the collateral to repay the lender. This innovation enables permissionless lending and borrowing in decentralized finance, making financial services more accessible and efficient. Its programmability allows for dynamic adjustments based on market conditions.
Context ∞ The concept of smart collateral is central to the functionality and growth of decentralized lending platforms and stablecoin protocols. News often covers innovations in how various digital assets can serve as smart collateral, as well as improvements in risk management for these systems. Understanding smart collateral is important for grasping the mechanics of decentralized finance and its potential to disrupt traditional financial services.