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The Collateral Factor is the maximum amount that can be borrowed against a specific asset in the Moonwell protocol. It is expressed as a percentage and indicates the value of an asset that can be used as collateral for borrowing purposes.
For example, if the Collateral Factor for a particular asset is 60%, it means that up to 60% of the value of that asset can be used as collateral to borrow other assets.
To understand the impact of the Collateral Factor, let's consider an example:
- Let's say the Collateral Factor for ETH is 60%.
- You provide $1000 worth of ETH as collateral.
- Based on the Collateral Factor, you can borrow up to $600 in other assets.
Note: It is highly recommended to keep your borrowing below 80% of your limit. In the example provided above, with a borrowing limit of $600, it is advisable not to exceed $480 ($600 * 80%). Going above 80% of your borrowing limit increases the risk of liquidation.
Liquidation occurs when the value of assets being used as collateral fall below a certain threshold, resulting in the seizure of the collateral by a liquidator to repay the borrowed assets. By staying below 80% of your borrow limit, you decrease the likelihood of liquidation and mitigate the associated risks.
The Reserve Factor is a term used to describe the percentage of interest paid by borrowers that is allocated to the reserves of the protocol. Each market has its own reserve, and this practice ensures the overall stability and sustainability of the protocol.
To understand the impact of the Reserve Factor, let's consider an example:
- Let's say you borrow $1000 USDC from the protocol.
- The USDC Borrow APY (Annual Percentage Yield) is 10%.
- Over the course of one year, you would pay approximately $100 in interest.
- If the reserve factor is 20%, $20 of the $100 is directed to the Moonwell USDC protocol reserve.
The Close Factor determines the maximum amount of an outstanding borrow that can be closed during a single liquidation event. It is expressed as a percentage and represents the proportion of the borrower's debt that can be repaid and the collateral seized by a liquidator.
To understand the impact of the Close Factor, let's consider an example:
- Let's suppose your account's remaining credit is 0%, indicating that it is now eligible for liquidation.
- You currently have an outstanding borrow of 100 USDC.
- The Close Factor for USDC.wh is 50%.
The Liquidation Incentive is a mechanism in the Moonwell protocol that provides additional collateral to liquidators as an incentive for performing liquidations. This practice helps to maintain the solvency of the protocol by encouraging efficient liquidation execution.
The Liquidation Incentive is equivalent to 10% of the outstanding borrow amount of an underwater account. It is divided into two components:
- 1.7% Liquidator Bonus: A portion (7%) of the Liquidation Incentive is awarded to the liquidator as a bonus. This bonus serves as a reward for executing liquidations promptly and effectively. By incentivizing liquidators, the Moonwell protocol encourages active participation and helps maintain the overall efficiency of the liquidation process.
- 2.3% Reserve Allocation: Another portion (3%) of the Liquidation Incentive is directed to the protocol reserves of the liquidated collateral. Allocating a portion of the Liquidation Incentive to protocol reserves help to reduce the risk of insolvency caused by cascading liquidations. By replenishing the reserves, the protocol ensures its ability to address potential short-term liquidity needs and maintain market stability.