What is Debt Collateral Ratio?

The Debt Collateral Ratio is a way to measure how much you can borrow based on what you own. It helps you understand the risks of borrowing too much.

How the Debt Collateral Ratio Works

Definition and Importance

The Debt Collateral Ratio measures the amount of money you can borrow based on the value of the assets you hold. It serves as a guideline to prevent you from borrowing more than what might be safe or manageable, considering the value of your collateral.

Calculation

To calculate your Debt to Collateral Ratio:

• Divide the total amount you owe by the total value of your assets.

• Example: If you owe $1,000 and own $2,000 in assets, your Debt Collateral Ratio is 50%.

Health Factor

Dough introduces a "Health Factor" which reflects the safety of your borrowing levels. A declining Health Factor suggests increased borrowing risk, alerting you to the need for action to avoid potential financial distress.

Maximum Debt Ratio

This ratio represents the upper limit of what you can borrow against your assets:

• Example: If the platform allows a maximum of 50% borrowing against your assets and you own $2,000, you could borrow up to $1,000.

Liquidation Risks

If you exceed the maximum allowable borrowing limit, or if your assets depreciate in value, leading your Health Factor to fall below a critical threshold (e.g., 1.03), you risk liquidation. This means part of your assets might be sold off to bring your account back into balance and ensure the platform's liquidity.

Impact of Multiple Assets on Debt Collateral Ratio

When you hold diverse assets like USDC and Ethereum (ETH), the Maximum Debt to Collateral Ratio is adjusted based on:

• The mix of assets: Different assets have different levels of risk and liquidity, influencing how much you can safely borrow against them.

• Collateral factors: Each type of asset has a specific factor that affects the overall borrowing capacity.

Examples:

• If 50% of your assets are in USDC and 50% in ETH, the maximum debt ratio might be approximately 67%.

• For a 75% USDC and 25% ETH split, the maximum ratio could be around 71%.

Why It Matters

Understanding the Debt Collateral Ratio and how it is influenced by various factors helps you borrow wisely and manage your financial risks effectively. Dough Finance provides clear metrics and guidelines to ensure you always know your borrowing limits and the implications of exceeding them. By aligning these practices with those of other major platforms like Aave, Dough ensures that you have a consistent and reliable borrowing experience across the DeFi landscape.