Borrowing Assets

On MachFi, borrowing assets is a streamlined process underpinned by decentralized finance (DeFi) principles, providing users with financial flexibility while ensuring systemic security. Borrowing on MachFi requires users to first supply collateral, which establishes their borrowing capacity based on the collateral's value and the platform's Loan-to-Value (LTV) ratios. This mechanism ensures that loans are over-collateralized, safeguarding the protocol against defaults.

Borrowing Mechanics on MachFi

When you supply an asset as collateral, MachFi assigns it a specific LTV ratio, which dictates the maximum borrowing power derived from that collateral. For example, if you deposit $1,000 worth of an asset like S, and its LTV is set at 75%, you can borrow up to $750 in another supported cryptocurrency or stablecoin. This LTV ratio ensures that there is a buffer to absorb market volatility, reducing the risk of liquidation.

MachFi dynamically adjusts borrowing interest rates based on the supply and demand of the borrowed asset. When demand for an asset rises, borrowing costs increase, incentivizing repayments and attracting more liquidity to the pool. This algorithmic approach balances the availability and cost of funds in the ecosystem. Borrowers must pay accrued interest on their loans, which compounds over time until repayment.

To manage risk, MachFi employs a health factor system, a critical metric that monitors the relationship between your collateral's value and your outstanding debt. A health factor above 1 means your position is secure, but if it drops below 1, it signals that your borrowed amount has exceeded the safe threshold, putting you at risk of liquidation. Borrowers must actively manage their positions by adding collateral or repaying part of their debt if the health factor approaches the critical level.

Critical Concepts in MachFi Borrowing

1. Loan-to-Value (LTV): LTV ratios vary depending on the asset's risk profile. Stable assets like USDC often have higher LTVs, while volatile assets like certain cryptocurrencies have lower LTVs. This differentiation ensures the protocol accounts for the varying levels of market risk.

2. Borrowing Capacity: Borrowing capacity is determined by multiplying the collateral's value by its LTV. For instance, depositing $2,000 of an asset with a 50% LTV gives you a borrowing capacity of $1,000. Borrowing beyond this capacity is not permitted and could expose you to liquidation if asset prices drop.

3. Liquidation Threshold: This is the maximum level of debt you can maintain relative to your collateral. If your borrow amount breaches this threshold due to price fluctuations, liquidation is triggered to protect the system's solvency.

MachFi's borrowing mechanics empower users to leverage their assets effectively while encouraging prudent risk management. With dynamic interest rates, a robust health factor system, and a clear framework for borrowing capacity, MachFi provides a secure yet flexible environment for users to access liquidity. However, users must stay vigilant about market conditions and the value of their collateral to mitigate risks inherent in DeFi lending.