Risk Parameters
Health Factor
The health factor is the numeric representation of the safety of your deposited assets against the borrowed assets and its underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario. If the health factor reaches 1, the liquidation of your deposits will be triggered.
Supply Caps
Supply caps define the maximum amount of an asset which can be supplied to the protocol. Supply caps can be used to limit the protocol’s exposure to riskier assets and protect against infinite minting exploits. A supply cap is an optional parameter, and the value will depend on on-chain liquidity of the asset and total volume of collateral assets in the pool.
Borrow Caps
Borrow caps define the maximum amount of an asset which can be borrowed. Borrow caps can be used to prevent traditional and flash borrowing of an asset which may experience a price exploit and lead to protocol insolvency. A borrow cap is an optional parameter, and the value will depend on-chain liquidity of the asset and total volume of borrowed assets in the pool.
Loan to Value
The Loan to Value (”LTV”) ratio defines the maximum amount of assets that can be borrowed with a specific collateral. It is expressed as a percentage (e.g., at LTV=75%, for every 1 ETH worth of collateral, borrowers will be able to borrow 0.75 ETH worth of the corresponding currency). Once a borrow occurs, the LTV evolves with market conditions.
Liquidation Threshold
The liquidation threshold is the percentage at which a position is defined as undercollateralised. For example, a Liquidation threshold of 80% means that if the value rises above 80% of the collateral, the position is undercollateralised and could be liquidated.
The delta between the LTV and the Liquidation Threshold is a safety mechanism in place for borrowers.
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