Borrowing

How much can a user borrow?

The maximum borrowing capacity for a user hinges on two key determinants: the collateralization ratio set by the Curvance DAO and available liquidity in the isolated market the user is using.

The collateralization ratio represents the acceptable borrowing threshold created for a specific asset. Given varying risk profiles, assets entail different levels of risk, leading to distinct collateralization ratios. For instance, an asset with a 75% collateralization ratio allows a user to borrow a maximum of $0.75 for every $1.00 worth of assets deposited.

However, the user's maximum borrowing limit, displayed on Curvance's front end and controlled by the Smart Contracts, is derived from a weighted blend of collateralization ratios across the various assets in an isolated market. This blended ratio dictates the highest LTV that users can borrow against their collateralized assets.

Furthermore, the user's borrowing capability is contingent upon the availability of sufficient liquidity within the pool. In cases where the pool lacks adequate liquidity to support the requested loan amount, borrowing may not be feasible.

Example:

A user deposits $100 worth of stETH onto the platform that earns around 4% APR. Utilizing the ERC-4626 architecture, the user would be earning a similar APR or higher from an underlying protocol.

stETH, recognized as a liquid and established asset, boasts an 85% collateralization ratio. Consequently, the user can borrow up to $85 worth of stablecoins against their $100 stETH collateral, adhering to the collateralization ratio's borrowing limit.

What is the Health Factor?

The Health Factor of a borrowing account is a crucial metric that indicates its financial stability and ability to cover its outstanding borrowings. This parameter is determined by comparing the collateral value held in the account against the borrowed funds.

Health Factor = Collateral Value / Borrowed Amount

A Health Factor surpassing 1 indicates adequate collateral value to cover the borrowed amount, signifying a healthy and solvent account. However, if the Health Factor dips below 1, the account enters insolvency, prompting Curvance's liquidation processes.

It's important to note that a Health Factor of less than 1 triggers full liquidation through Curvance's bad debt socialization mechanism. Nonetheless, Curvance's liquidation engine operates proactively, initiating liquidations before the Health Factor reaches 1. It scales linearly between the soft liquidation level—entailing a smaller liquidation amount with a lower penalty—and the hard liquidation level, constituting full liquidation with a higher penalty. Learn more about the liquidation engine in Liquidations.

We recommend maintaining a Health Factor above 1 to ensure safety, ideally targeting 1.5 or higher, especially during times of extreme market volatility. Failing to maintain a sufficient Health Factor may result in partial or full collateral loss due to Curvance's proactive liquidation processes.

Repaying Loans

To close a borrowing account, a user must return the borrowed funds and any accrued interest to the lending pool. The debt has to be paid back with the same asset that was borrowed. This can be done through the Curvance front end or directly through the smart contracts.

Once repaid, the user can redeem their collateral and underlying assets by transferring to the protocol the cTokens they received when making their initial deposit.

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