@williegtbx
DeFi lending protocols handle market volatility through automated liquidation mechanisms and risk management strategies. When a borrower's collateral value drops below a set threshold, smart contracts trigger liquidation, selling assets to repay the loan and protect the protocol. To prevent systemic risk, protocols like Aave and Compound use over-collateralization, real-time price oracles, and dynamic interest rates. Some adopt risk-adjusted collateral factors based on asset volatility. Others use stability pools or insurance funds to cover losses. These tools ensure solvency, user confidence, and protocol resilience during sharp market swings.
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