Reserve Factor

The Reserve Factor is a valuable tool for managing volatile markets, as it can be adjusted at the asset level to create an additional buffer that contributes to the protocol's treasury. This parameter represents the portion of revenues generated from borrower interest payments that is retained by the protocol. These retained funds serve as a liquidity backstop or insurance fund and can also supplement the treasury in the future, subject to community input.

Essentially, the Reserve Factor defines the difference between what the protocol collects from borrowers and what it distributes to suppliers. Adjusting the reserve factor can impact borrower and supplier incentives, enabling the protocol to strategically encourage either borrowing or supplying behaviors as needed.