Definition ∞ Under-Collateralized Borrowing refers to a lending arrangement where the value of the collateral provided by the borrower is less than the value of the loan received. In traditional finance, this is common with credit checks, but in decentralized finance (DeFi), it typically relies on reputation protocols, credit delegation, or specific flash loan mechanisms. This practice introduces higher risk for lenders. It expands access to capital.
Context ∞ Under-collateralized borrowing remains a developing and high-risk area within decentralized finance, as protocols seek methods to extend credit efficiently without traditional credit scores. Innovations in reputation systems and pooled liquidity are continuously explored to mitigate associated risks. The long-term viability of these models is a key subject of ongoing research.
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