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Alice vs Bob Case Study

Case Study: Alice vs Bob

To illustrate the importance of conservative borrowing, let’s compare two users:

Alice (Over-Leveraged)​

  • Collateral: 2 ETH (worth $4,000)
  • Collateral Factor (CF): 75% → Max Borrow = $3,000
  • Borrowed: $2,800 USDC (≈ 70% LTV)
  • Market Drop: ETH price falls 20% → Collateral value drops to $3,200
  • Outcome:
    • Allowed Borrow now = $3,200 × 75% = $2,400
    • Alice owes $2,800, exceeding the new limit
    • Her position is liquidated; she loses collateral plus pays liquidation penalty

Bob (Conservative)​

  • Collateral: 2 ETH (worth $4,000)
  • Collateral Factor (CF): 75% → Max Borrow = $3,000
  • Borrowed: $1,500 USDC (37.5% LTV)
  • Market Drop: ETH price falls 20% → Collateral value drops to $3,200
  • Outcome:
    • Allowed Borrow now = $3,200 × 75% = $2,400
    • Bob owes $1,500, well below the new limit
    • His position remains safe; he can choose to self-liquidate or hold

Key Takeaways​

  • Don’t Borrow to the Limit: Leaving a buffer protects against typical market swings.
  • Conservative LTV: Borrowing at 50–60% of your limit offers a strong safety margin.
  • Self-Liquidation Option: If you’re approaching your threshold, repay early to avoid forced liquidation and penalties.

Next: Quiz​

Test your knowledge in Quiz: Safe Borrowing Practices.