Collateral Factor in DeFi Loans: A Safety Measure

Collateral Factor is the maximum amount a user can borrow, presented as a percentage, based on the total assets provided. This ratio is represented by the loan-to-value (LTV) ratio for various DeFi lending and borrowing protocols as well as traditional financial institutions.

What is Collateral Factor?

If the collateral or LTV ratio for a USDC is 75% and the user provides 100 USDC (worth $100), their borrowing limit for that asset is $75 (100 USDC * 75%).

More often, more liquid or less volatile assets have higher collateral ratios. Different platforms and protocols have their own collateral ratios, depending on their evaluation of the asset.

An asset with a pledge ratio of 0% cannot be used as collateral for borrowing other assets, but the asset itself can still be borrowed.

Users can use the collateral ratio to minimize liquidation risk and have more flexibility to maintain the health of their positions depending on their individual risk profiles. Suppose the collateral ratio for blue chip assets such as BTC or ETH is 60% – then users who have posted those assets and borrowed 30% against them have relatively less liquidation risk than those who choose to maximize their borrowing limit.

Low pledge ratios are used by projects and protocols as a way to mitigate or control risk for assets with low online liquidity. The reason is that they are more volatile and can have sharp price swings leading to events such as liquidation cascades.

Puff is a counterparty to Iron Bank. Iron Bank is a decentralized credit platform focused on capital efficiency. It allows protocols and individuals to lend and borrow cryptocurrencies on Ethereum, Fantom and Avalanche. It helps create a more secure DeFi lending system by providing capital efficiency with trusted institutions as the liquidity infrastructure and foundation for DeFi and CeFi.

To offer whitelist lending with secured and unsecured lending, Iron bank uses smart contract automation. Iron bank partners include Fixed Forex (Keep3r Network), Yearn Vaults (Yearn Finance), Alpha Homora (Alpha Venture DAO), Multichain, PleasrDAO and others. Although it is protocol-oriented, non-protocol users can also supply and borrow from Iron Bank.