# Under Collateralized Lending ⎊ Area ⎊ Resource 2

---

## What is the Loan of Under Collateralized Lending?

The extension of capital, typically cryptocurrency, against posted collateral where the value of the collateral is less than the borrowed amount, creating an immediate unsecured exposure for the lender. This practice is common in decentralized finance but elevates credit risk significantly compared to over-collateralized positions. Prudent management requires stringent haircut application.

## What is the Collateral of Under Collateralized Lending?

The margin posted is insufficient to fully cover the outstanding derivative obligation or loan principal, meaning a market downturn will result in a shortfall that the protocol must absorb. This gap represents the direct loss potential for the system's liquidity providers or the counterparty.

## What is the Solvency of Under Collateralized Lending?

The maintenance of sufficient capital buffers to absorb losses arising from these insufficient collateral positions is the ultimate test of a lending protocol's design. A failure to manage this risk leads directly to insolvency and potential contagion across the broader DeFi landscape.


---

## [Decentralized Credit Markets](https://term.greeks.live/term/decentralized-credit-markets/)

## [Gearing Ratio Stress Testing](https://term.greeks.live/term/gearing-ratio-stress-testing/)

## [Credit Risk Modeling](https://term.greeks.live/term/credit-risk-modeling/)

## [Systems Interconnection Risks](https://term.greeks.live/term/systems-interconnection-risks/)

## [Asset Valuation Techniques](https://term.greeks.live/term/asset-valuation-techniques/)

## [Margin Engine Architecture](https://term.greeks.live/term/margin-engine-architecture/)

## [Market Evolution Analysis](https://term.greeks.live/term/market-evolution-analysis/)

---

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---

**Original URL:** https://term.greeks.live/area/under-collateralized-lending/resource/2/