How do collateral haircuts affect the risk management of digital asset lending platforms?

1 answers

• Christoffersen ClausenJul 03, 2022 · 3 years ago
  Collateral haircuts are a risk management mechanism used by digital asset lending platforms to protect against potential losses. When lenders accept collateral from borrowers, they apply a haircut to the value of the collateral. This means that the lender will only lend a percentage of the collateral's value, reducing their risk exposure. The haircut amount varies depending on factors such as the volatility of the digital asset and the creditworthiness of the borrower. By implementing collateral haircuts, lending platforms can mitigate the risk of default and ensure that they have a sufficient cushion to cover any potential losses. This risk management measure helps to safeguard the platform and maintain the trust of its users.
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