What it means
A loan in a lending market whose collateral is worth less than the debt, so it can't be fully repaid.
It can happen when prices crash faster than liquidations can run. The loss usually falls on lenders in that market.
How it works
It's one of the risks of supplying to a lending market.
Related terms
| Term | What it means |
|---|---|
| Liquidation | When a lending protocol sells a borrower's collateral because its value has fallen too close to the loan. |
| Collateral | What a borrower deposits to secure a loan, which the protocol can sell if the loan isn't safe any more. |
| Lending market | An onchain pool where people supply money that others borrow, with the interest paid by borrowers going to those who supplied it. |
This glossary explains terms in general. It isn't investment, tax or legal advice.