Loss Given Default

Loss Given Default is the percentage of exposure that a creditor expects to lose if a counterparty defaults. It represents the severity of the financial hit after accounting for any collateral, guarantees, or recovery efforts that can be liquidated.

In crypto lending protocols, this metric is heavily influenced by the liquidity of the collateral asset and the speed at which the protocol can sell that asset during a market crash. A higher Loss Given Default implies that the collateral is insufficient or too volatile to cover the debt, leading to bad debt for the protocol.

It is a core component in calculating expected credit losses for decentralized lending platforms. If a protocol has a low Loss Given Default, it means their collateralization strategy is robust against market swings.

This value is dynamic, changing based on market conditions and the haircut applied to different assets. Minimizing this metric is the primary goal of over-collateralization models in DeFi.

It directly dictates the sustainability of the protocol during extreme volatility events.