Rehypothecation

Rehypothecation comes from traditional prime brokerage, where a broker holding a client's collateral reuses it as its own security against third parties. It is a regulated practice: in the United States, the SEC's Rule 15c3-3 caps rehypothecation at a percentage of the client's debit balance, and the EU and UK impose contractual and disclosure limits. In DeFi it appears in a composable form when collateral deposited in one protocol is reused in another: you deposit ETH in a money market, receive a receipt token, and use that receipt as collateral in a third protocol. Each layer reuses the underlying value.

It balances two forces. On one side, capital efficiency: the same collateral makes capital work several times over. On the other, systemic risk: if one link fails, collateral can be committed across several layers at once, raising contagion and double-pledging risk. It is a core due-diligence and compliance question, since it forces you to check whether client collateral is segregated or rehypothecated.