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Rehypothecation
Rehypothecation, a term borrowed from traditional finance, is now a hot topic in the cryptocurrency world, bringing both opportunities and significant risks.
In simple terms, rehypothecation occurs when a lender reuses the collateral provided by a borrower for its own purposes, like securing loans or making trades. In crypto, this can boost liquidity and leverage but also introduces higher risks.
Imagine you deposit collateral on a crypto exchange for margin trading. The exchange might then use that same collateral to engage in its own trading activities. If the exchange faces financial trouble, your collateral could be at risk, leaving you vulnerable to losses.
Rehypothecation can occur in various areas, including margin trading, DeFi protocols, and custodial exchanges. Understanding this practice is crucial for managing your exposure and safeguarding your assets. 0 reply
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