compound.finance

Compound.finance collateral determines borrowing capacity as asset prices change

Compound.finance collateral supports borrowing, and falling collateral prices can reduce an account’s loan limit. In Compound III, accepted collateral backs borrowing of the market’s base asset. Separate collateral factors govern additional borrowing and liquidation. A price decline can therefore prevent a new loan or collateral withdrawal before the account becomes eligible for liquidation.

The relevant comparison includes recorded collateral, its protocol price, and outstanding debt with accrued interest. Compound III and Compound v2 apply different collateral rules, so a borrowing limit only makes sense within the version and market that hold the position.

Collateral, Interest, and Reward Balances

Compound III tracks token rewards for base asset suppliers and borrowers, subject to the market’s reward configuration and accrual conditions. Supplying collateral alone doesn’t establish reward eligibility. An outstanding reward balance also doesn’t automatically increase the collateral that supports a loan.

Interest follows a separate distinction: a positive base asset balance earns supply interest, while a base asset debt accrues borrowing interest. Collateral assets don’t earn Compound III supply interest. A displayed reward amount therefore shouldn’t be treated as an automatic offset against growing debt.

Market Eligibility and Recorded Collateral

Collateral must belong to the selected market’s accepted asset set before it can support borrowing there. The asset’s configuration identifies its collateral factors, price feed, and supply cap. A token’s presence in a wallet doesn’t establish eligibility, and identical tickers aren’t enough to identify the correct asset contract. Match the asset and account to the market that holds the loan.

A supply operation credits collateral to the designated account. Token approval only authorizes the transfer; it doesn’t itself create that collateral balance. The account’s recorded collateral balance distinguishes an executed supply from an approval or pending transaction.

Borrowing Capacity From Asset Values

Borrowing capacity combines each accepted collateral balance with its protocol price and borrow collateral factor. In a common valuation unit, multiply each collateral quantity by its price and factor, then add the contributions. Compare that total with the value of outstanding base asset debt, including interest. Different assets can contribute different borrowing capacity despite having equal market values. The asset information functions expose these separate factors, so a single portfolio percentage can conceal the weights behind the displayed limit.

Can a Price Drop Block Borrowing Before Liquidation?

Yes, Compound III can reject additional borrowing while its debt remains below the liquidation threshold.

The Borrowing Boundary

The borrow collateral factor governs the debt that collateral can support when borrowing increases. After a price decline, existing debt can exceed that capacity without a new transaction. Further borrowing then requires enough additional collateral or debt reduction to satisfy the borrowing check. A previously available limit doesn’t remain reserved for the account.

The Liquidation Boundary

Compound III uses liquidation collateral factors that are higher than its borrow collateral factors. The difference creates a price buffer between the two boundaries. It doesn’t provide a fixed time allowance: another price movement or additional interest can consume the remaining margin.

Debt Growth Between Transactions

Borrowing interest can reduce collateral headroom even when the collateral price stays unchanged and the account takes no further loan. Compound III’s borrow rate depends on base asset utilization through its configured interest model. The debt comparison must therefore include accrued interest rather than only the original borrowed amount. An unchanged collateral token balance doesn’t establish an unchanged risk position.

Adding Collateral or Repaying Debt

Additional collateral and repayment affect different sides of the same comparison: one increases weighted backing, while the other reduces debt.

Additional Accepted Collateral

A collateral deposit contributes its value multiplied by the applicable factor. The market’s supply cap can prevent that deposit even when the account needs more backing. The cap applies to aggregate supplied units of that asset, and a transaction that would exceed it reverts. Falling prices don’t themselves create room under a cap measured in token units.

Base Asset Repayment

Supplying the base asset to an indebted Compound III account repays its debt. Supplying a different accepted collateral asset adds backing instead. Repayment therefore avoids the need for additional collateral capacity under that asset’s supply cap, although the transfer still needs sufficient funds and authorization. The relevant amount is the base asset actually credited against the intended account’s debt.

What Does Compound III Liquidation Remove?

Compound III liquidation transfers the liquidated account’s collateral to the protocol and clears its borrowing debt through absorption.

The accounting credits collateral value after the applicable liquidation adjustment and offsets the debt. The account typically retains an excess base asset balance, but it doesn’t retain the original collateral tokens. The liquidation collateral factor determines eligibility; the separate liquidation factor affects the collateral valuation during absorption.

Oracle Prices and Parameter Changes

Collateral checks use the prices that the protocol obtains from its configured feeds. A price shown elsewhere may differ from the value used in the account calculation. Both collateral and debt need a consistent valuation basis, including the base asset’s price. An unchanged number of borrowed tokens can represent a different debt value when that price changes.

Governance can also change collateral factors and supply caps. Those parameters belong to a specific market configuration rather than a permanent rule for a token. A reduced borrow collateral factor lowers borrowing capacity without itself changing the liquidation collateral factor. Read the active values when assessing a position; a proposal describing different values doesn’t establish that those values already govern it.

Compound v2 Collateral Boundaries

Compound v2 represents supplied assets through cTokens, whose exchange rates account for supply interest. Its Comptroller determines collateral eligibility through entered markets and their collateral factors. Account liquidity combines weighted collateral values and subtracts borrow values; a shortfall creates liquidation exposure. Compound III’s separate borrowing and liquidation thresholds shouldn’t be applied to that calculation.

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Liquidation also differs. In v2, a liquidator repays debt and receives collateral, subject to the applicable close factor and liquidation incentive. Compound III’s absorption mechanism has a different outcome for the account’s collateral holdings. The version distinction matters when estimating which assets a liquidation can remove.

Withdrawals After Debt Reduction

A collateral withdrawal reduces the backing available to any remaining debt. Compound III checks the resulting position against borrowing collateral requirements, so an account can remain outside liquidation territory and still lack capacity for the requested withdrawal. The amount of collateral on deposit isn’t necessarily the amount available to remove.

Repayment creates room by lowering debt, but a subsequent withdrawal uses some of that room. Assess the remaining collateral after the proposed removal rather than carrying forward the pre-withdrawal limit. A smaller debt alone doesn’t establish that every collateral withdrawal will pass.