Borrow Cap Reduction

Borrow Cap Reduction is a governance action that limits the total amount of an asset that can be borrowed from a protocol. This is used to manage systemic risk by preventing excessive exposure to a single asset or a single borrower.

If a protocol determines that an asset is becoming too risky or that the total debt is becoming unsustainable, it can lower the borrow cap. This forces existing borrowers to repay their loans or face liquidation.

It is a proactive measure to prevent the protocol from reaching a point of no return. It helps in maintaining a healthy balance between liquidity and risk.

By limiting borrowing, the protocol can effectively manage its risk profile in a changing market.