Collateral and Reserves

ARCO implements the collateral and reserve mechanics implemented by the Compound Protocol.

Reserve factor

Reserves are an accounting entry in each token contract that represents a portion of historical interest (set aside as cash) which can be withdrawn or transferred through the protocol's governance (once this is enabled). A small portion of borrower interest accrues into the protocol, determined by the reserve factor. The reserve factor is the percentage of interest paid to the ARCO protocol. If the reserve factor is 10, then that would imply a 10% rate of interest paid on the borrowed asset allocated to ARCO.

Collateral factor

Tokens have a collateral factor that can range from between 0-90%, and represents the proportionate increase in liquidity (borrow limit) that an account receives by minting the scToken.

Large or liquid assets tend to have high collateral factors; whereas smaller or more illiquid assets will tend to have lower collateral factors. If an asset has a 0% collateral factor, it cannot be used as collateral (or seized in a forced liquidation event). However, the asset can still be borrowed.

In summary, the Collateral Factor is the maximum you can borrow against a particular asset.

Example: if the collateral factor for $APT is 80%, the maximum amount of USDT you would be able to borrow in other assets (assuming a deposit of $APT 1000) would be $800.