When Your Collateral Becomes a Liability

Collateral's true value isn't its screen price, but what it can actually sell for in a crisis. Host Ceres Quinn explains the "Pawn Shop Problem," revealing how DeFi protocols often misprice collateral by ignoring liquidity risk, leading to death spirals and bad debt when markets turn. The solution lies in adopting liquidity-adjusted Loan-to-Value (LTV) ratios, ensuring assets can be cleared in one hour without collapsing their price. Key Highlights: • The "Pawn Shop Problem" illustrates how collateral's true value is its rapid exit price, not its listed market price. • DeFi lending protocols often make a quiet assumption that collateral can be cleanly exited at screen price, ignoring market depth. • In a crash, collateral values drop while liquidity vanishes, creating a "death spiral" where selling assets further depresses their price. • Adopting liquidity-adjusted Loan-to-Value (LTV) ratios, based on an asset's one-hour clearable value, is crucial for protocol survival. Topics: Crypto RWA Brief, Ceres Quinn, Collateral, Liquidity, DeFi lending protocols, Loan-to-Value, Pawn Shop Problem, Death spiral, Real-world assets, Market crashes, Bad debt, Risk management --- Follow Ceres Quinn on Instagram: @ceresquinn Newsletter: https://cryptorwabrief.beehiiv.com