Understanding Risk Factor

Each lending position essentially consists of a supplied and a borrowed part. The ratio of the 2 determine the health of your position. Take the following example:

Supplied

• Asset: 1 EGLD

• Price: 15$

• Loan to Value: 75% (you can borrow up to 75%*15$=11.25$)

• Liquidation Threshold: 80% (you get liquidated when your borrowed reaches 80%*15$=12$)

Borrowed

• Asset: 350 XOXNO

• Price: 0.03$

Risk factor

• The risk factor is computed as

$$\text{risk(position)} = \frac{\text{borrowedInDollars}}{\text{liquidationCollateralInDollars}}$$

• In above case, that would be

$$\text{risk(position)} = \frac{\text{350 * 0.03\$}}{\text{1 * 15\$ * 80\%}} = \frac{\text{10.5\$}}{\text{12\$}} = 87.5\%$$

That means the position is medium risky. If the value of your collateral drops or the value of your borrowed surges in price, Liquidation can occur.