Default Intensity

Default intensity is the instantaneous probability that a default event will occur in the next infinitesimal time interval. It is the core metric used in intensity-based default models to price credit-sensitive instruments.

In decentralized finance, this intensity is often derived from the market prices of collateralized debt positions or the yields on lending protocols. If the intensity increases, it signals that the market perceives a higher risk of insolvency for a protocol or borrower.

This allows for the real-time adjustment of risk premiums and collateral requirements. By monitoring default intensity, participants can hedge against the credit risk of smart contract platforms.

It transforms the binary outcome of default into a continuous, measurable risk factor. This is essential for maintaining the stability of credit markets within the crypto ecosystem.