Borrowing Capacity

Borrowing capacity is the total amount of debt a user can take on within a protocol based on their deposited collateral and the protocol's risk parameters. It is determined by the combination of the collateral's market value, the applicable loan-to-value ratio, and any collateral haircuts.

Users must monitor their borrowing capacity to avoid hitting their limit, which would prevent them from taking out further loans or could lead to liquidation. As market prices fluctuate, a user's borrowing capacity changes, requiring active management.

Protocols often provide dashboards to help users track this capacity in real-time. Managing borrowing capacity is essential for maintaining a balanced and safe portfolio.

It allows users to optimize their leverage while keeping their risk exposure within acceptable bounds. Understanding this concept is critical for any participant in a decentralized lending market.