Token Collateral refers to digital assets pledged by a user as security to borrow other assets or to open a leveraged position within decentralized finance protocols. This collateral is typically locked in a smart contract and can be liquidated if the value of the borrowed assets or the position moves unfavorably. It mitigates lending risk.
Context
The management and valuation of token collateral are fundamental to the stability and functionality of decentralized lending and borrowing platforms. Volatility in collateral asset prices can lead to rapid liquidations, impacting market dynamics and user strategies.
Binance stepped in with a $283 million payout to cover user losses following a depeg event and market crash, highlighting the risks of leveraged crypto positions.
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