Collateral Eligibility Risk

Collateral eligibility risk is the possibility that an asset used to back a loan or derivative position may be disqualified by the protocol or counterparty due to changes in its risk profile. If an asset is deemed ineligible, the borrower may face an immediate margin call or liquidation of their position, even if the asset price remains stable.

This risk is particularly high for assets with controversial histories or those subject to new regulatory guidance. Participants must carefully manage their collateral portfolios to ensure that their assets remain within the acceptable parameters of the lending platform, as failure to do so can lead to significant financial loss.