What Is the Concept of ‘Rehypothecation’ in Traditional Finance and How Does It Relate to DeFi?

Rehypothecation in traditional finance is the practice where a bank or broker uses a client's collateral (e.g. securities) for their own trading or lending activities. This introduces systemic risk and a lack of transparency.

In DeFi, the equivalent risk is often seen when a lending protocol uses a user's deposited collateral for other purposes, such as staking or lending it out again, without explicit user consent or clear risk disclosure. While DeFi is more transparent, complex yield-generation strategies can introduce similar hidden leverage and counterparty risk.