Collateral Rehypothecation vs Segregated Collateral Pools

Collateral Rehypothecation, as pioneered by protocols like MakerDAO and Aave, excels at maximizing capital efficiency by allowing deposited assets to be reused as collateral for new loans within the same system. This creates a powerful flywheel, boosting Total Value Locked (TVL) and liquidity. For example, Aave's v3 markets on Ethereum and Polygon have facilitated billions in borrowing by leveraging this model, but this efficiency introduces systemic risk; a cascading liquidation in one market can propagate instability across the entire protocol.

Segregated Collateral Pools, the model used by Compound and Euler Finance (pre-hack), take a different approach by isolating risk into distinct, non-fungible vaults. This results in a critical trade-off: superior risk containment and customizable parameters per asset (e.g., unique Loan-to-Value ratios for each pool) at the cost of fragmented liquidity. A depegged stablecoin in one Compound pool cannot directly threaten collateral in another, making the system more resilient but potentially less capital-efficient for lenders seeking the highest yields.

The key trade-off: If your priority is maximum capital efficiency and deep, unified liquidity for mainstream assets like ETH and stablecoins, choose a rehypothecation model like Aave. If you prioritize risk isolation, regulatory clarity for novel assets, or bespoke risk parameters, choose a segregated pool architecture like Compound. The decision hinges on whether you are optimizing for growth or security.

Collateral Rehypothecation excels at maximizing capital efficiency and boosting yields by allowing the same asset to secure multiple positions. For example, protocols like Aave and Compound leverage this model to achieve higher utilization rates, with some pools historically reaching over 80% utilization, directly increasing lender APYs. This model is foundational for deep, liquid markets where a single unit of capital can work harder across the ecosystem.

Segregated Collateral Pools take a different approach by isolating risk through dedicated, non-fungible vaults. This results in a trade-off of lower systemic capital efficiency for dramatically enhanced risk isolation and customizability. Protocols like MakerDAO with its distinct vault types (ETH-A, WBTC-B) or Lyra Finance for options liquidity demonstrate how this model prevents contagion, allowing for tailored risk parameters and asset-specific strategies without cross-pool exposure.

The key trade-off is Capital Efficiency vs. Risk Containment. Rehypothecation creates a tightly coupled, high-efficiency system where a single asset failure can cascade, as seen in the Iron Bank incident. Segregated pools are more resilient but require more locked capital to achieve similar market depth. Your protocol's tolerance for systemic risk versus its need for maximum yield generation will dictate the path.

Consider Collateral Rehypothecation if your priority is building a high-liquidity, general-purpose lending/borrowing protocol where maximizing APY for depositors and minimizing borrowing costs are critical. It's ideal for established, highly liquid assets like ETH and wBTC within a mature risk framework.

Choose Segregated Collateral Pools when launching a protocol with novel or volatile assets, complex derivative products (e.g., options, structured products), or where regulatory clarity demands clear asset segregation. This model is superior for risk-sensitive DeFi and protocols requiring bespoke, asset-specific liquidation logic.