Emergency Freeze

An emergency freeze mechanism is a common safety measure among DeFi protocols to prevent cascading loan defaults.

This mechanism can be triggered when many loans enter a critical zone of "toxic debt." This unhealthy zone is typically identified by a Health Factor dipping below 1. A Health Factor reflects the collateralization ratio of a loan (how much collateral is locked up compared to the borrowed amount). If the Health Factor of a large number of portfolios in the protocol falls below 1, it signifies insufficient collateral to cover the loan, putting the entire system at risk.

In this case, an emergency freeze will be initiated, temporarily halting borrowing, lending, and potentially even asset transfers to prevent further deterioration and allow corrective actions. This safeguard helps maintain the stability of the DeFi protocol and protects lenders from widespread loan defaults.