Borrow
Borrowing in Soul Protocol allows you to access additional funds by leveraging your supplied and collateralized assets. This feature gives you the ability to use funds without selling your current holdings. However, borrowing requires careful management of your collateral to ensure you maintain a healthy account and avoid liquidation.
In Soul Protocol, "borrow" refers to taking a loan from the protocol using the value of your supplied and collateralized assets as security. When you borrow, the protocol calculates your borrowing limit based on your collateral balance and its associated collateral factor. For example, if you've added 100 USDC as collateral with a collateral factor of 80%, your borrowing limit would be 80 USDC.
Here's how borrowing works and what you need to monitor to stay healthy:
Borrow Limit: The maximum amount you can borrow is determined by the total value of your collateralized assets, weighted by their respective collateral factors. If you exceed this limit, the protocol will reject the transaction.
Liquidation Limit: This is slightly higher than your borrow limit and is calculated using the liquidation thresholds of your collateral assets (which are always greater than their collateral factors). If your collateral value drops or your borrow balance rises too much, your position may be liquidated.
Health Factor: Your account’s health is measured as the ratio of your liquidation limit to your total borrow balance. A high health factor indicates a safer position, while falling below 1 puts you at risk of liquidation.
For example, suppose you deposit ETH worth 1,000 USD and designate 800 USD of it as collateral. With an 80% collateral factor and an 85% liquidation threshold, your borrow limit is 640 USD, and your liquidation limit is 680 USD. In this scenario, you could borrow 544 USD worth of USDC, resulting in a health factor of 1.25. However, if the price of ETH drops and your collateral value decreases, your health factor may fall below 1, putting your position at risk of liquidation.
Key tips to stay healthy:
- Monitor your health factor regularly.
Keep an eye on the value of your collateral and adjust it if necessary.
Repay your borrowings periodically to manage your risk. By staying within your borrow limits and maintaining a healthy collateralization ratio, you can use borrowing safely and effectively in the Soul Protocol.