What Role Does Collateral Play in a Decentralized Finance (DeFi) Lending Protocol?
In DeFi lending, collateral secures the loan, ensuring the lender is protected if the borrower defaults. Since there is no central authority, the collateral is locked in a smart contract.
If the borrower's health factor drops due to falling collateral value, the protocol automatically liquidates the collateral to repay the loan.
Glossar
Collateral Valuation
Framework ⎊ Collateral valuation within cryptocurrency derivatives necessitates a quantitative approach, differing from traditional finance due to asset volatility and market microstructure.
Decentralized Finance (DeFi)
Architecture ⎊ Decentralized Finance (DeFi) fundamentally reconfigures traditional financial infrastructure by leveraging blockchain technology, primarily Ethereum, to create open, permissionless, and transparent systems.
Health Factor
Resilience ⎊ Health Factor, within cryptocurrency derivatives, quantifies a system’s capacity to absorb shock and maintain core functionality.
DeFi Lending
Collateral ⎊ Decentralized finance lending protocols fundamentally rely on collateralization to mitigate counterparty risk, a core tenet derived from traditional secured lending practices.