What Is “Under-Collateralization” and What Is Its Consequence?
Under-collateralization occurs when the value of the collateral backing a debt or derivative position falls below the value of the liability. In a DeFi protocol, this means the system has "bad debt" that cannot be fully covered by the liquidated assets.
The consequence is a threat to the protocol's solvency, often requiring a bailout from a governance fund or a recapitalization event.
Glossar
Oracle Price Feed
Mechanism ⎊ Oracle price feeds represent a critical infrastructural component within decentralized finance, functioning as bridges between on-chain smart contracts and external, real-world data sources.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Tokenized Options
Derivative ⎊ Tokenized options represent a novel intersection of decentralized finance (DeFi) and traditional options trading, enabling the fractionalization and on-chain representation of options contracts.