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Understanding Collateralization in Compound v3

Compound v3 (also called “Comet”) requires you to over-collateralize your loans to protect the protocol and other users. Here’s how it works:

Collateral Factors​

Definition
Each asset you supply as collateral has a Collateral Factor (CF).

Meaning
A CF of 75 % means you can borrow up to 75 % of your collateral’s USD value.

Calculation Example

  • You supply 1 ETH valued at $2,000
  • ETH’s CF is 75 %
  • Max borrowable = $2,000 × 75 % = $1,500

Loan-to-Value (LTV) Ratio​

Definition
The ratio of your outstanding debt to your collateral value.

Formula

LTV = Borrowed Amount / Collateral Value

Safety Buffer
Aim to borrow only part of the maximum. If CF is 75 %, consider using 50 – 60 % LTV.

Example

  • Collateral Value: $2,000
  • Borrowed: $1,000
  • LTV = $1,000 / $2,000 = 50 %
  • Since 50 % < 75 % CF, this position is safe.

Health Factor & Liquidation Threshold​

Health Factor (HF)
A metric showing position safety.

Formula

HF = (Collateral Value × CF) / Debt
  • HF > 1 → Position is safe
  • HF ≤ 1 → At risk of liquidation

Liquidation Threshold
Usually equal to the CF. If your debt reaches the maximum allowed, liquidators can repay part of your debt and seize your collateral at a penalty.

Example

  • Collateral: $2,000
  • CF: 75 %
  • Allowed Borrow: $1,500
  • Debt: $1,500
  • HF = (2000 × 0.75) / 1500 = 1.0 → At risk of liquidation.

Practical Tips​

  1. Borrow Conservatively – target 50 – 60 % LTV, not the full CF.
  2. Account for Volatility – more-volatile assets → use a lower LTV.
  3. Monitor Regularly – check daily or set alerts when LTV > 65 %.
  4. Use Alert Tools – portfolio trackers (e.g., DeBank, Zapper) can notify you when your LTV approaches danger.

Next Steps​

Proceed to Module 1.2: Over-Leveraging to learn how borrowing loops amplify risk and how to avoid them.