Glossary · DeFi
Bad debt
Also: insolvency, protocol insolvency
Bad debt is debt left outstanding after a position's collateral has become worth less than what it owes, a shortfall that falls on the protocol's lenders or its treasury rather than on the borrower.
Related terms
- Liquidation
- Liquidation is the process in which a third party repays part of an undercollateralized borrower's debt and receives their collateral at a discount, closing the shortfall before the protocol takes a loss.
- Isolated market
- An isolated market is a lending market defined by a single collateral asset, loan asset, oracle and liquidation threshold, so that bad debt arising in it cannot spread to lenders in other markets.
- Oracle
- An oracle is the contract that reports an asset's price to a protocol, and because liquidations fire on the oracle's number rather than on any exchange screen, its design and update cadence are a first-order risk.
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