Explain the Concept of ‘Collateral Factor’ and Its Role in Risk Management

The collateral factor (or loan-to-value ratio) is the maximum percentage of a collateral asset's value that can be borrowed. A lower collateral factor (e.g.

75%) means the asset is considered riskier and requires more over-collateralization. Protocols use collateral factors to manage risk by limiting the amount of debt that can be taken against volatile assets, preventing quick liquidations and cascades.