What Is the Role of Collateralization in Reducing Counterparty Risk in DeFi? ⎊ Path

What Is the Role of Collateralization in Reducing Counterparty Risk in DeFi?

Collateralization in DeFi is the practice of a borrower pledging assets as security for a loan or financial position. This is fundamental to reducing counterparty risk in a trustless environment.

By locking collateral into a smart contract, lenders are assured that there are assets available to cover the loan in the event of a default. The smart contract acts as a neutral escrow, automatically managing the collateral based on predefined rules.

This system replaces the need for credit checks and legal agreements, relying instead on economic guarantees.

What Is the Concept of “Economic Finality” in PoS?

Why Are Centralized Oracles Generally Unsuitable for Trustless Financial Derivatives?

What Is “Over-Collateralization” and Why Is It Common in DeFi?

What Is the Role of a Central Counterparty (CCP) and How Might DLT Replace or Augment It?

Define ‘Trustless’ in Financial Technology

What Is a “DAO” and How Does It Relate to Trustless Governance?

How Does PoS Reduce the Environmental Concerns Associated with PoW?

How Does Proof of Stake (PoS) Reduce Energy Consumption Compared to PoW?