Collateral Swap
Replacing the collateral backing an open DeFi loan with a different asset, without first closing out the existing position, typically done in a single atomic transaction.
A collateral swap replaces the specific asset backing an open DeFi loan with a different asset, without requiring the borrower to first repay and close the existing loan and then separately reopen a new one with the new collateral. This is typically executed as a single atomic transaction, often using a flash loan (see Kaavon's "Flash Loan" glossary definition) internally to briefly bridge the gap between withdrawing the old collateral and depositing the new collateral within that same transaction.
Borrowers commonly use a collateral swap to respond to changing market conditions or risk preferences — for example, moving out of a collateral asset the borrower now believes carries more downside risk or a higher chance of pushing the position toward its liquidation threshold (see Kaavon's "Liquidation Threshold" glossary definition), and into a different asset perceived as more stable, all without needing to unwind the entire borrowing position and reopen it separately.
Examples
- A borrower growing concerned about their collateral asset's volatility might execute a collateral swap, moving to a more stable asset without needing to first repay and reopen their entire loan.
- A collateral swap is typically executed as a single atomic transaction, often using a flash loan internally to bridge the moment between withdrawing the old collateral and depositing the new collateral.