BadDept

Bad Debt refers to debt that cannot be repaid or is unlikely to be recovered, often due to the borrower’s inability to provide sufficient collateral or repay their loan obligations. In DeFi, bad debt can arise from liquidations failing to cover outstanding debt, or from extreme market volatility leading to insufficient collateral values. Bad debt poses risks to the protocol's solvency, and protocols typically implement mechanisms like reserve funds, insurance pools, or liquidation penalties to mitigate its impact and maintain stability.