Collateral Factor Explained: How It Shapes DeFi Borrowing

When working with Collateral Factor, the percentage that decides how much you can borrow against an asset in a lending protocol. Also known as CF, it directly influences the Loan‑to‑Value, the ratio of loan amount to collateral value and sets the Liquidation Threshold, the point where a position gets liquidated. Understanding these links helps you manage Risk Management, the process of controlling exposure to loss in protocols like Compound, Aave, and Maker.

How Protocols Set the Collateral Factor

Each DeFi platform decides the Collateral Factor through governance votes or risk‑engine models. Stablecoins often enjoy high factors—up to 90%—because their price stays steady. Volatile assets such as ETH or BTC usually sit between 50% and 75% to cushion price swings. The factor reflects an asset's liquidity, market depth, and historical volatility, so a higher number means you can borrow more, but it also raises the chance of a margin call.

Borrowing power isn’t static; it reacts to utilization rates. When many users tap into a pool, the protocol may lower the Collateral Factor to protect lenders, which in turn nudges borrowers toward repayment or additional collateral. This dynamic keeps the system balanced and prevents a cascade of liquidations during market stress.

Interest rates are tied to the same risk calculus. A higher Collateral Factor usually coincides with a higher borrow rate because lenders demand more compensation for the added exposure. Conversely, if utilization drops, rates can fall, making the loan cheaper but also signaling that the protocol feels safer about the current factor levels.

Should the price of your collateral dip below the Liquidation Threshold, automated bots will trigger a sale to recover the loan amount. This process protects the pool but can wipe out a portion of your position. Liquidators earn a bonus, which is why you’ll often see a small spread between the Collateral Factor and the Liquidation Threshold—called the safety margin. Keeping an eye on real‑time price feeds and the health factor of your loan is essential to avoid unexpected liquidations.

For everyday users, the practical steps are simple: check the Collateral Factor of each asset before you borrow, calculate your maximum drawdown using the health factor, and set alerts for price moves near the liquidation point. Many dashboards now display these metrics side‑by‑side, letting you tweak positions without diving into smart‑contract code. With that foundation, you’ll be ready to explore the collection of articles below, each digging deeper into specific assets, protocol updates, and advanced risk‑management techniques.