Debt Recovery

Debt recovery is the process by which a lender attempts to reclaim the outstanding balance of a loan when a borrower defaults or when collateral is liquidated. In decentralized finance, this process is fully automated through smart contracts that sell the collateral to repay the lender.

If the sale of the collateral is insufficient to cover the debt, the protocol may face a shortfall, which can impact the overall solvency of the system. To prevent this, protocols often maintain insurance funds or use secondary collateral sources to cover any remaining debt.

The efficiency of the recovery process is vital for maintaining market confidence and ensuring that lending remains a viable activity. It is the final safety net in the cycle of credit and collateral.