Collateral Factor

Definition ∞ The collateral factor in decentralized finance determines the maximum amount one can borrow against a specific digital asset. Expressed as a percentage, this factor indicates the loan-to-value ratio for collateralized loans on lending platforms. For instance, a 70% collateral factor means a user can borrow up to 70% of the value of their deposited asset. This parameter is critical for managing risk within lending protocols, safeguarding against market volatility and potential liquidations.
Context ∞ The discussion around collateral factors in DeFi protocols centers on balancing capital efficiency for borrowers with risk management for lenders and the protocol itself. Adjustments to these factors are often subjects of governance proposals, reflecting ongoing efforts to optimize protocol stability and utility. Future developments may involve dynamic collateral factors that adjust automatically based on real-time market conditions and asset volatility, enhancing the resilience of decentralized lending markets.