Insolvency
When a firm's liabilities exceed its assets, or it can no longer pay what it owes as obligations fall due.
The two senses come apart: a firm can be balance-sheet insolvent while still paying bills, or perfectly solvent on paper yet unable to meet withdrawals because its assets are illiquid. In digital assets, insolvency usually becomes public as a withdrawal halt, because the record of who is owed what sits in the firm's private database and outsiders cannot see the shortfall until redemptions stop. A separate meaning applies at the protocol level: a lending market carries bad debt when collateral is liquidated for less than the loan it secured, typically because prices gapped faster than liquidators could act. Protocol insolvency is visible on-chain and is often absorbed by a reserve fund or socialized across depositors.
In practice
A lending protocol whose liquidations fail during a sharp move carries the resulting shortfall as bad debt, which reduces what depositors can collectively withdraw.
The common misunderstanding
That a withdrawal halt is a temporary technical measure, when it is usually the moment an internal shortfall becomes visible and users are converted into creditors.