Borrowing limits define the maximum amount of digital assets a user can borrow from a decentralized lending platform. These limits are typically determined by the value and type of collateral a user supplies, along with the protocol’s risk parameters. They function as a risk management tool to protect lenders from potential losses due to market fluctuations or borrower defaults. Protocols adjust these parameters based on market conditions and asset volatility.
Context
Discussions around borrowing limits frequently appear in DeFi news, particularly during periods of market volatility or when new lending protocols are launched. Adjustments to these limits by decentralized autonomous organizations often signal shifts in risk appetite or changes in underlying asset assessments. Users closely monitor these limits as they directly affect their capital efficiency and potential for liquidation.
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