Debt Position

The asset deposited by a user to secure a loan. This acts as the security for the borrowed funds. The value of the collateral, relative to the debt, determines the position's health ratio. Common examples include ETH, wBTC, and LP tokens. The collateral type dictates the loan-to-value (LTV) ratio and liquidation thresholds set by the protocol.

The asset borrowed against the posted collateral. This is the fungible token the user receives liquidity in, such as a stablecoin (DAI, USDC) or a volatile asset. The debt accrues interest at a variable or fixed rate, increasing the total liability over time. Repaying this asset, plus interest, is required to unlock the collateral.

A numerical metric representing the safety of a position. It is calculated as (Collateral Value * Liquidation Threshold) / Debt Value. A health factor below 1.0 triggers liquidation. This is the primary risk parameter monitored by both users and protocols to ensure system solvency. Higher values indicate a larger safety buffer.

The enforced process of selling a position's collateral to repay its debt when the health factor falls below a protocol-defined threshold. This is a risk management mechanism to protect the protocol from undercollateralized loans. Liquidations can be partial or full and often involve incentives (e.g., a discount or bonus) for liquidators who execute the transaction.

The maximum borrowing power against deposited collateral, expressed as a percentage. For example, an LTV of 75% on $100 of ETH allows borrowing up to $75. It is a static risk parameter set per collateral type by the protocol governance. The actual LTV of a position (Debt / Collateral) changes with market prices and must stay below this maximum to avoid liquidation.

The cost of borrowing, typically expressed as an annual percentage rate (APR) or yield. Rates can be variable (algorithmically adjusted based on pool utilization) or fixed. Interest accrues continuously on the outstanding debt, increasing the liability. This rate is a key component of a protocol's monetary policy and revenue model.

The Collateral Factor (or Loan-to-Value Ratio) is the maximum percentage of an asset's value that can be borrowed against. It is a key risk parameter set by the protocol.

• Example: A 75% collateral factor on $100 of ETH allows borrowing up to $75 in stablecoins.
• A higher factor increases capital efficiency but also increases liquidation risk.

The Liquidation Threshold is the collateral value ratio at which a position becomes eligible for liquidation. It is always higher than the borrowed amount to create a safety buffer.

• Mechanism: If (Borrowed Value / Collateral Value) > Liquidation Threshold, the position is undercollateralized.
• This threshold, combined with the Liquidation Penalty, protects lenders from bad debt.

The Health Factor is a real-time metric representing the safety of a debt position. It is calculated as (Collateral Value * Liquidation Threshold) / Borrowed Value.

• Health Factor > 1: Position is safe.
• Health Factor <= 1: Position is at risk of liquidation.
• This is the primary number users monitor to manage their leveraged positions.

A Debt Ceiling is a protocol-level parameter that caps the total amount that can be borrowed against a specific collateral asset. It is a systemic risk control.

• Purpose: Prevents over-concentration in a single asset and limits protocol exposure to a collateral's volatility or potential depeg.
• Once the ceiling is reached, no new debt can be issued against that collateral type.

The Liquidation Penalty (or Liquidation Bonus) is an additional fee charged to a borrower when their position is liquidated. It incentivizes liquidators to participate.

• Mechanism: Liquidators can repay the debt at a discount (e.g., 5%) and seize the corresponding collateral.
• This penalty is added to the borrower's debt, making the liquidation more costly for them.

Debt positions accrue interest based on a defined rate model. The two primary types are:

• Variable Rate: Interest fluctuates based on pool utilization (supply/demand). Common in pools like Aave and Compound.
• Stable Rate: Interest is fixed for a period, offering predictability but often at a premium. Subject to rebalancing if market rates diverge significantly.

The assets (e.g., ETH, wBTC) a user deposits to secure a loan and open a debt position. The value of the collateral, adjusted by a Loan-to-Value (LTV) ratio, determines the maximum amount that can be borrowed. If the collateral's value falls below a maintenance threshold, the position may be liquidated.

The forced closure of a debt position when its health factor falls below 1 (i.e., the debt value exceeds the allowable collateral value). A liquidator repays part or all of the debt in exchange for the collateral at a discount, ensuring the protocol remains solvent. This is a key risk management mechanism.

A numerical metric representing the safety of a debt position. It's calculated as (Collateral Value * LTV Ratio) / Debt Value. A health factor above 1 indicates a safe position; below 1 triggers liquidation. Protocols like Aave and Compound use this to monitor risk in real-time.

A cryptocurrency pegged to a stable asset, like the US Dollar (e.g., DAI, USDC). These are the most common debt asset borrowed from lending protocols because they minimize volatility risk for the borrower. Users often deposit volatile collateral to mint or borrow stablecoins.

The original term popularized by MakerDAO. A CDP is a smart contract that holds collateral and generates the stablecoin DAI as debt. It is the foundational model for most modern debt position systems in DeFi, explicitly linking locked collateral to minted stable debt.

A protocol-level parameter that sets a maximum limit on the total debt that can be issued against a specific type of collateral. It is a critical risk and governance tool to prevent over-concentration and protect the system from the failure of a single collateral asset.