7.3 DeFi Collateralization Potential

A core objective of Parax is to unlock the collateral potential of real-world assets by enabling their seamless integration into decentralized financial primitives. Once tokenized and verified, physical assets acquire properties of composability, programmability, and finality, qualifying them as on-chain collateral candidates within DeFi lending, stablecoin minting, and derivative issuance frameworks.

The ERC-721 tokens and their fractional ERC-20 derivatives may be staked as collateral within isolated lending pools, where risk parameters: such as loan-to-value (LTV), liquidation threshold, and oracle dependency: are governed by DAO-approved configurations. For high-value Tier I assets under institutional custody, LTV ratios may approach those of digital-native blue-chip NFTs, subject to verified custody proof and continuous oracle attestations.

Liquidation mechanisms vary based on asset class and pool design. In cases where market liquidity is sufficient, liquidation may occur through automated Dutch auctions. For low-liquidity or bespoke assets, Parax implements escrowed buyback queues and reputation-based underwriter pools that backstop liquidation risk in exchange for premium yield.

Collateral eligibility is determined by multi-factor criteria including asset class, custody tier, verification score, and historical trading volume. These parameters are encoded into a collateral scoring algorithm that interfaces with protocol-level lending modules, enabling autonomous risk assessment and dynamic margin requirements. This framework ensures systemic solvency while extending the utility of real-world assets into the on-chain credit economy.