DeFi Foundations and Advanced Protocols Understanding Rehypothecation

Introduction

Decentralised finance (DeFi) has evolved from a niche experiment into a global ecosystem that rivals traditional banking in terms of daily volume, market depth, and innovation speed. As participants move beyond simple lending and borrowing to more complex derivatives, liquidity provision, and synthetic asset creation, the underlying mechanics of risk management and collateral handling grow increasingly sophisticated. One such mechanism that has attracted attention is rehypothecation—a practice that re‑uses collateral across multiple positions, and is the focus of this guide.

Collateral reuse and synthetic collateral

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Advanced Protocols Leveraging Collateral Reuse

AMMs such as Uniswap, SushiSwap, and Curve pool together assets from many users to enable instant trades. These advanced protocols—see Beyond Basics: Advanced DeFi Protocol Terms and the Role of Rehypothecation—enable composable finance, allowing one protocol’s logic to be reused by others.

The pooled liquidity is essentially a form of collateral. When you deposit an ERC‑4626 vault, you’re essentially contributing to a collateral pool that can be used by other protocols.

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Synthetic Asset Platforms

In addition to traditional collateral, users can lock synthetic collateral—synthetic assets that are minted by protocols such as Synthetix by locking real or other synthetic assets—Mastering Rehypothecation: A Deep Dive into DeFi Library Concepts. The synthetic tokens themselves can be used as collateral on other protocols, further illustrating how synthetic collateral can be re‑used across chains and protocols.

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What is Rehypothecation?

Rehypothecation in DeFi is often defined as the process by which a user’s collateral is re‑used by other protocols or platforms. This practice is central to many innovative financial products and introduces both opportunities and risks into the ecosystem. For a deeper look at the mechanics and implications, see Mastering Rehypothecation: A Deep Dive into DeFi Library Concepts.

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Real‑World Examples

MakerDAO and DAI

MakerDAO’s DAI is a stablecoin backed by over‑collateralised positions. Users can lock ETH or other assets in the Maker Vault and receive DAI, which can then be supplied back into other DeFi protocols, creating a cycle of rehypothecation. MakerDAO’s governance community regularly debates collateral types and ratios, partly in response to observed collateral reuse patterns—see Beyond Basics: Advanced DeFi Protocol Terms and the Role of Rehypothecation for more on how such discussions shape the protocol’s risk framework.