A lending protocol, what is the maximum percentage of assets that can be borrowed based on the liquidity provided by the user?
Question: A lending protocol, what is the maximum percentage of assets that can be borrowed based on the liquidity provided by the user?
A lending protocol is a smart contract that allows users to borrow and lend crypto assets without intermediaries. One of the key parameters of a lending protocol is the **collateral factor**, which determines the maximum percentage of assets that can be borrowed based on the liquidity provided by the user.
The collateral factor is usually expressed as a ratio between 0 and 1. For example, if the collateral factor is 0.75, it means that the user can borrow up to 75% of the value of their deposited assets. The higher the collateral factor, the more leverage the user can get, but also the higher the risk of liquidation.
Liquidation occurs when the value of the borrowed assets exceeds the value of the deposited assets multiplied by the collateral factor. In that case, the protocol will automatically sell some of the user's collateral to repay the debt and charge a liquidation penalty. Therefore, users should always monitor their **collateralization ratio**, which is the ratio between the value of their borrowed and deposited assets, and keep it below the collateral factor.
Different assets may have different collateral factors depending on their volatility and liquidity. For example, stablecoins may have higher collateral factors than volatile tokens, because they are less likely to fluctuate in price and more likely to be traded in large volumes. Users can check the current collateral factors of each asset on the protocol's website or dashboard.
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