# 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entry in each token contract that represents a portion of historical interest (set aside as cash) which can be withdrawn or transferred through the protocol's governance (once this is enabled).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.\
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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.