Add Collateral
In Soul Protocol, adding collateral means designating a portion of your supplied assets to secure borrowing or enhance your borrowing power. This helps maintain a healthy account by reducing liquidation risk. Collateralized assets continue to earn interest, allowing you to maximize capital efficiency while strengthening your position in the protocol.
"Add collateral" refers to the process of locking a portion of your supplied assets as collateral to increase your borrow limit. This allows the protocol to use those assets as security for borrowed funds. For example, if you supply 500 USDC but initially don't add it as collateral, you won't have borrowing power. However, by marking 300 USDC as collateral, you unlock a borrow limit proportional to the collateral factor of the asset.
What happens when you add collateral?
Collateralization: The protocol updates your collateral balance in the relevant SToken smart contract, enabling the assets to back your borrowings.
Borrow Limit Adjustment: Your borrowing limit increases based on the collateral factor of the added asset. This improves your account's ability to handle debt or market fluctuations.
Enhanced Safety: With more collateral, your health factor improves, making it less likely to face liquidation during market volatility.
Example of Adding Collateral:
Imagine you've supplied 1,000 USDC into the protocol but haven't added any as collateral. Without collateral, your borrowing power is zero. If you decide to add 700 USDC as collateral and the collateral factor is 80%, your borrow limit becomes 560 USDC (80% of 700 USDC). This action allows you to borrow safely while maintaining a healthy buffer.
Why is adding collateral important?
Increased Borrowing Power: It allows you to access additional funds without selling your assets.
Improved Health Factor: Adding collateral reduces the risk of liquidation by increasing the buffer between your borrow balance and the liquidation limit.
Flexibility: You can dynamically adjust your collateral to match your borrowing needs or manage risk during volatile market conditions.
What to consider when adding collateral:
Only assets that are marked as collateral contribute to your borrowing power.
Over-collateralizing can improve safety but limits the liquidity of your supplied assets for withdrawal.
Market conditions can affect the value of your collateral, so it's important to monitor price changes.
Adding collateral is a foundational action in Soul Protocol, ensuring your account is well-protected while maximizing your borrowing potential. By maintaining a balanced collateralization strategy, you can confidently navigate the protocol and make the most of its features.