Collateral Risk Weights

Collateral risk weights are numerical factors assigned to different assets within a margin system to determine how much value they contribute toward a trader's borrowing power. Assets with high liquidity and low volatility are assigned higher risk weights, allowing them to provide more collateral value.

Conversely, assets with high volatility, low liquidity, or poor smart contract security are assigned lower risk weights. This mechanism ensures that a protocol is not overexposed to risky or easily manipulated assets.

By applying these weights, the protocol effectively haircuts the value of the collateral, creating a safety buffer. Traders must understand these weights because they directly impact their leverage capacity and the likelihood of hitting a liquidation threshold.

These weights are dynamic and can be adjusted by governance or automated risk engines based on changing market conditions.