Collateral Factor

Collateral factors and how Algofi protocol uses them.

What is a collateral factor?

Users supply assets to the protocol to borrow against, but not all assets are treated equally. The dollar price of stablecoins tends to be very stable, while assets like ALGO exhibit more price volatility. Furthermore, the liquidity of risky tokens tends to deteriorate during market sell offs.
As a result, when calculating how much a user can borrow against their collateral, the Algofi protocol allows more borrow for lower volatility assets like stablecoins than higher volatility assets like ALGO.
This weighting is done with a Collateral Factor. The Collateral Factor represents how much a user can borrow against the collateral supplied to the protocol, in percent terms. For example, if ALGO has a collateral factor of 50%, then for $10 supplied, $10 * 50% = $5 of value can be borrowed against.
Collateral Factors are employed to keep the protocol safe and liquid. During market sell offs, as collateral values fall, lower collateral factors ensure there are enough assets to liquidate so bad loans can be repaid by liquidators and lenders are made whole.
The collateral factor of riskier assets like ALGO tends to be lower than the collateral factor of safer assets like stablecoins.