Collateral Factor

What Is Collateral Factor?

Collateral Factor is the maximum amount a user can borrow, represented in percentages, based on the total amount of assets supplied. It is also represented by the loan to value ratio (LTV) for various DeFi lending and borrowing protocols, as well as traditional financial institutions.

In the context of cryptocurrencies, if the Collateral Factor or LTV of USDC is 75%, and a user supplies 100 USDC (worth $100) the user’s borrow limit on this asset would be $75 (100 USDC * 75%) to borrow other assets.

Generally, more liquid or less volatile assets have higher collateral factors, which can change with market conditions. Different platforms and protocols have their own designated collateral factor depending on their assessment of the asset

If an asset has a 0% collateral factor, it cannot be used as collateral for borrowing other assets, though the asset itself can still be borrowed.
Depending on individual risk profiles, users can use the collateral factor to minimize liquidation risk and have more leeway to maintain the health of their positions. For example, if the collateral factor of a blue-chip asset like BTC or ETH is 60%, users who deposit those assets and borrow 30% against them have a relatively lower liquidation risk as compared to others who choose to maximize the borrow limits.
Lower collateral factors can also be utilized as a way for projects and protocols to mitigate or control risks for assets with lower on-chain liquidity, as those are more volatile and likely to have drastic price fluctuations leading to events such as liquidation cascades.