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Collateral Factor
HomeGlossary TermsCollateral Factor

Collateral Factor

June 24, 2023BY Ubik Capital
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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.

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