Under-Collateralized Loan

Definition ∞ An under-collateralized loan is a debt arrangement where the value of the assets pledged as security is less than the amount borrowed. In traditional finance, this might involve unsecured personal loans based on creditworthiness. In decentralized finance, such loans typically involve specific trust mechanisms or reputation systems rather than over-collateralization. These loans carry higher risk for lenders due to insufficient asset backing.
Context ∞ Under-collateralized loans are a significant area of discussion in the decentralized finance (DeFi) space, as they represent a step towards more capital-efficient lending models. Debates center on the viability of reputation-based lending and the development of robust credit scoring systems in a pseudonymous environment. Future developments include advanced identity solutions and protocol designs that enable more secure and widespread under-collateralized lending.