Definition
Borrowing is receiving assets with an obligation to repay them under agreed terms, usually including interest. In DeFi, a common model lets a user deposit collateral into a protocol and borrow another supported asset against it.
How It Works
The borrowing limit depends on eligible collateral, its value and the protocol’s risk parameters. For example, collateral worth 1,000 units with a 60% borrowing limit allows up to 600 units of debt before other constraints. Interest can accumulate after the loan opens, and the borrowing limit is not necessarily the liquidation threshold.
Key Considerations
Borrowed funds are a liability, not income. Falling collateral prices, rising debt-asset prices or accrued interest can weaken the position. Liquidation can sell collateral and add costs if the required margin is breached. Repayment must satisfy the debt’s denomination and accrued charges; closing exposure therefore requires more than simply returning the initial fiat value.