A collateral factor is the proportion of an eligible collateral asset’s assessed value that a lending protocol counts toward borrowing capacity. It applies a risk adjustment to the collateral rather than measuring the borrower’s actual collateral-to-debt ratio.
Calculating borrowing capacity
For a simple single-asset position, borrowing capacity equals assessed collateral value multiplied by the borrow collateral factor. Suppose eligible collateral is valued at $1,000 and the hypothetical factor is 75%. The resulting capacity is $750. If existing debt is $300, the remaining capacity is $450, assuming unchanged prices, no accrued interest and no other protocol limits.
With several collateral assets, a protocol can aggregate their separately adjusted values. Actual borrowing can also be restricted by market liquidity, supply or borrow caps, asset eligibility and account configuration.
Borrowing limits versus liquidation
The parameter’s exact role depends on the protocol and version. Compound III, for example, distinguishes the borrowing collateral factor from a separate, higher liquidation collateral factor. Losing permission to borrow more therefore need not immediately make an account eligible for liquidation.
A higher factor permits more borrowing against the same assessed collateral, but is not a guarantee of safety. Price changes, interest accrual, oracle behavior and parameter updates can reduce the available buffer. The current market configuration determines which values apply.