Collateral Factor

The collateral factor represents the amount of collateral needed to mint another asset or secure a loan. It establishes the maximum borrowing limit. Also known as collateral ratio, it is commonly used in over-collateralized DeFi loans. Collateral factors vary, with a typical example being 1:2 (or 50%), indicating that a borrower could borrow $500 USD if their deposited collateral is valued at $1000. If the value of a user’s collateral falls below the collateral factor, additional collateral must be added to avoid the risk of liquidation to partially repay the loan.