How Can Smart Contracts Be Used to Collateralize a Decentralized Loan?
A smart contract can automatically lock the borrower's collateral (e.g. cryptocurrency) in an escrow-like mechanism. The contract is programmed to release the loan funds upon collateral deposit.
If the loan is repaid, the contract returns the collateral. If the collateral value drops below a liquidation threshold, the contract automatically sells or liquidates the collateral to cover the debt, all without a bank or legal intermediary.
Glossar
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.
Overcollateralization
Mitigation ⎊ Overcollateralization within cryptocurrency, options, and derivatives functions as a risk management technique, demanding borrowers pledge assets exceeding the loan or contract value.
Collateral Value
Guarantee ⎊ Collateral value within cryptocurrency derivatives functions as an assurance of solvency for counterparty risk, particularly crucial given the volatility inherent in digital asset markets.