Collateral Factor
The percentage of an asset's value that can be used as borrowing power. If ETH has a collateral factor of 75%, depositing $10,000 of ETH allows borrowing up to $7,500.
Every asset on a lending protocol carries a risk rating baked into a single number: the collateral factor. It tells you how much of your deposited asset the protocol will actually let you borrow against — because no lender, human or algorithmic, will let you borrow 100 cents on a volatile dollar.
The collateral factor is set by the protocol's governance based on an asset's volatility, liquidity, and market depth. A stablecoin like USDC might carry a collateral factor of 90% — it barely moves in price, so the protocol can lend you close to its full value. ETH might sit at 75-80%. A small-cap token might be 50% or zero.
How It Works
Deposit $10,000 of ETH with a 75% collateral factor and you have $7,500 in borrowing power — not $10,000. That $2,500 gap is the protocol's buffer. If ETH drops, that buffer absorbs the loss before the loan goes underwater.
Your actual borrowing limit across multiple assets is the weighted sum of each asset's collateral factor. Deposit $10,000 ETH (75%) and $5,000 USDC (90%) and your total borrowing power is $7,500 + $4,500 = $12,000. Add more assets, and the math compounds — which is where borrowers start losing track.
Collateral factor is distinct from the liquidation threshold. The collateral factor is how much you're allowed to borrow. The liquidation threshold is the point at which the protocol seizes your collateral. On Aave, these two numbers are deliberately different — the gap between them is your margin of safety.
Why It Matters
The collateral factor is the single biggest lever on how much risk you're taking when you borrow. Borrow at 90% of your collateral factor and a 10% price drop in your collateral wipes out your safety margin entirely. Borrow at 50% and you have real room to breathe.
What is Liquidation Threshold?
The LTV ratio at which a lending protocol will begin liquidating a borrower's collateral. For example, if the liquidation threshold is 80%, your collateral will be sold if your debt reaches 80% of its value.
Full glossary entryBill's Take
In 25 years of mortgage lending, we had a concept called loan-to-value — LTV. An 80% LTV mortgage meant the bank would lend you 80 cents on every dollar of home value. The collateral factor in DeFi is the same idea, run in reverse: instead of the lender setting your max LTV, the protocol encodes it directly into the smart contract. No negotiation, no exceptions, no loan officer to call.
What to Watch
Collateral factors are not permanent. Governance votes can lower them — and when they do, your existing position can suddenly be closer to liquidation than it was yesterday, without any action on your part. Check your health factor regularly. A position that looked safe last month may not be safe today.
Liquidation Risk
Borrowing close to your maximum collateral factor is how liquidations happen fast. A 20% price drop in your collateral doesn't just reduce your borrowing power — it can trigger automatic liquidation before you even see the alert. Keep your utilization well below the maximum. The protocol won't call you first.
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