What is Collateral Factor?

The collateral factor is the amount of collateral required to mint another asset or collateralize a loan. It sets the maximum borrowing amount. Also called the collateral ratio, it's commonly used on over-collateralized decentralized finance (DeFi) loans. Although they vary, a typical collateral factor would be 1:2 (or 50%), meaning you could borrow $500 USD if the deposited collateral is worth $1000. When the value of a user's collateral falls below the collateral factor (for example with a volatile asset), they must add more collateral or risk their collateral being liquidated to repay a portion of the loan.