Rehypothecation: One Collateral Pool, Many Claims
Rehypothecation lets one pool of collateral back several loans at once, creating more market exposure than the underlying capital could support.
A borrower posts an asset. The lender pledges that same asset to a second party for its own funding, and that party may do the same again. No new asset exists, yet several claims each believe they are secured.
The leverage follows a geometric series: total exposure is roughly 1 / (1 - r), where r is the share reused at each step. At 50% reuse, 100 units supports about 200 in exposure. At 75% it is about 400. At 90% it is about 1,000. No single balance sheet shows that total.
The risk also changes type. Segregated collateral carries price risk. Re-pledged collateral adds counterparty risk, because if the lender fails, the borrower becomes an unsecured creditor.
Crypto has shown both versions. In 2022, centralized lenders deployed customer deposits into trading and yield strategies, and withdrawals froze when counterparties could not repay. On-chain, staked ETH tokens were looped as collateral to borrow more ETH. When the token traded at a discount in mid-2022, those positions were squeezed by weaker collateral and limited exit liquidity.
Stress hits every layer together, since each link depends on the same asset. Margin calls land at once and everyone competes for the same supply, so the chain weakens as a whole.
The key insight: a collateral ratio describes your loan, not how many other loans lean on the same asset. The difference between reused and segregated collateral only shows up under stress.
#Crypto #DeFi #RiskManagement #Markets
Rehypothecation lets one pool of collateral back several loans at once, creating more market exposure than the underlying capital could support.
A borrower posts an asset. The lender pledges that same asset to a second party for its own funding, and that party may do the same again. No new asset exists, yet several claims each believe they are secured.
The leverage follows a geometric series: total exposure is roughly 1 / (1 - r), where r is the share reused at each step. At 50% reuse, 100 units supports about 200 in exposure. At 75% it is about 400. At 90% it is about 1,000. No single balance sheet shows that total.
The risk also changes type. Segregated collateral carries price risk. Re-pledged collateral adds counterparty risk, because if the lender fails, the borrower becomes an unsecured creditor.
Crypto has shown both versions. In 2022, centralized lenders deployed customer deposits into trading and yield strategies, and withdrawals froze when counterparties could not repay. On-chain, staked ETH tokens were looped as collateral to borrow more ETH. When the token traded at a discount in mid-2022, those positions were squeezed by weaker collateral and limited exit liquidity.
Stress hits every layer together, since each link depends on the same asset. Margin calls land at once and everyone competes for the same supply, so the chain weakens as a whole.
The key insight: a collateral ratio describes your loan, not how many other loans lean on the same asset. The difference between reused and segregated collateral only shows up under stress.
#Crypto #DeFi #RiskManagement #Markets