Definition
Collateral factor is a core risk management parameter in DeFi lending markets that specifies the maximum proportion of an asset’s value that can be counted as borrowing power. It is usually expressed as a percentage and determines how much a user can borrow from a lending pool relative to the value of the collateral they have supplied. A higher collateral factor means a larger share of the collateral’s value contributes to borrowing capacity, while a lower factor reflects more conservative risk assumptions.
This concept is closely related to the collateral ratio, which measures the actual relationship between borrowed value and collateral value at a given moment. When a user’s borrowing approaches the limit implied by the collateral factor, their position becomes more exposed to liquidation if market prices move against them. Protocols adjust collateral factors per asset based on liquidity, volatility, and overall DeFi market conditions to balance capital efficiency with system safety.
Context and Usage
In a lending pool, each supported asset typically has its own collateral factor that governs how much borrowing it can back. More volatile or less liquid assets tend to be assigned lower collateral factors, limiting the amount that can be borrowed against them to reduce the likelihood of forced liquidation events. Stable, highly liquid assets may receive higher factors, enabling more efficient use of deposited capital.
Collateral factor interacts with other protocol parameters such as liquidation thresholds and Borrow APR to shape the overall risk–return profile for borrowers and lenders. When market prices fall or interest costs accumulate, a borrower’s collateral ratio can move closer to the effective limit implied by the collateral factor, increasing the chance of liquidation. Understanding the collateral factor for each asset helps clarify how conservative or aggressive a protocol’s risk settings are within the broader DeFi ecosystem.