What is Default Risk?
Default risk is the likelihood that a borrower will fail to make required debt payments. In DeFi lending, this primarily affects undercollateralized or uncollateralized loan protocols.
Default Risk in DeFi
- Overcollateralized loans: Low default risk due to liquidation mechanisms
- Undercollateralized loans: Higher risk, requires credit assessment
- Uncollateralized loans: Highest risk, relies on reputation systems
Managing Default Risk
- Require overcollateralization (150%+ ratios)
- Implement automatic liquidations
- Use credit scoring for undercollateralized lending
- Diversify across multiple borrowers