Understanding Collateral Cap
The collateral cap is a crucial security feature designed to mitigate protocol-wide lending risk by diversifying it across multiple assets.
It defines the maximum allowable collateral for a market, measured in units of the corresponding token.
This mechanism enables the measurement and limitation of the borrowing power for each asset.
Mitigating Protocol Risks in Token Markets
The collateral cap is a per-token setting that controls and limits the protocol risks linked to each token market.
Factors such as infinite minting of tokens or coins, protocol rugs, or exploits can lead to abnormal and unexpected price drops.
Managing Risk with Collateral Caps in Token Markets
By implementing collateral caps, the protocol can restrict the maximum potential loss it may incur due to market collapses or extreme price fluctuations in specific token markets.
This mechanism proves effective in risk management and control.
Proper monitoring and readjustment of collateral caps, especially in volatile market conditions, are crucial to prevent any adverse impacts on lending and borrowing protocols and the interconnected ecosystems.