Advanced
Lending Protocols (Mechanics) — Key concepts
Understand collateral, liquidation, and health factor.
Developer Advanced
4/8 — Lending Protocols (Mechanics) — Key concepts
Borrow capacityDeposits enable borrowing up to a collateral factor.
Max borrow
maxBorrow = collateralValue × collateralFactor
Collateral factor expressed as a fraction (e.g., 0.75).
Health factorTracks solvency buffer.
Health factor
HF = (collateralValue × liqThreshold) ÷ debtValue
HF > 1 is safe; HF < 1 can be liquidated.
Interest accrualBorrow rates are often variable, based on utilization.
Utilization
U = debt ÷ (cash + debt − reserves)
Rates often scale with U (kinked models).
LiquidationWhen HF < 1, liquidators can repay part of the debt and seize collateral with a bonus (close factor + bonus).
Key points
- Collateral factor vs liquidation:Threshold more conservative for liquidation.
- Utilization-driven interest:Higher U → higher borrow rate, incentivizing repayments/supply.
- Reserve factor skims interest:To a reserve; affects net APY to suppliers.
- Close factor caps how:Much debt can be repaid per liquidation.
- Oracle safety:Freshness, decimals, and circuit-breakers per asset.