Token Collateralization involves securing a digital asset with another asset, typically cryptocurrency, to back its value or enable lending. This mechanism ensures that the value of the collateralized asset is maintained, often through overcollateralization to absorb price volatility. It is a fundamental component of decentralized finance.
Context
Token collateralization is a cornerstone of stablecoins and decentralized lending platforms, frequently discussed in crypto news related to DeFi stability and risk management. The health and sufficiency of collateralization ratios are critical for preventing liquidations and maintaining confidence in pegged assets. Changes in collateral requirements or asset values can significantly impact these systems.
A critical misvaluation of wrapped staked Ether collateral allowed a rapid, multi-transaction liquidation and asset drain, exposing the systemic risk of external data dependency.
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