Collateral and Reserves (Base)

Reserve Factor

Reserves are an accounting entry in each soToken contract that represents a portion of historical interest which can be withdrawn or transferred through the protocol's governance. A small portion of borrower interest accrues into the protocol, determined by the reserve factor. The reserve factor is the percentage of interest paid to the Sonne Finance. If the reserve factor is 10, then that would imply a 10% rate of interest paid on the borrowed asset allocated to Sonne.

Collateral Factor

soTokens have a collateral factor that can range from between 0-90%, and represents the proportionate increase in liquidity (borrow limit) that an account receives by minting the soToken.

Large or liquid assets tend to have high collateral factors; whereas smaller or more illiquid assets will tend to have lower collateral factors. If an asset has a 0% collateral factor, it cannot be used as collateral (or seized in a forced liquidation event). However, the asset can still be borrowed.

In summary, the Collateral Factor is the maximum you can borrow against a particular asset.

Example: if the collateral factor for USDC is 75%, the maximum amount of USDC you would be able to borrow in other assets (assuming a deposit of 1000 USDC) would be $750.

Sonne implements the collateral and reserve mechanic implemented by Compound Finance.

TOKEN	COLLATERAL FACTOR	RESERVE FACTOR
USDbC	85%	13%
USDC	85%	13%
DAI	85%	13%
wETH	70%	15%
cbETH	65%	18%
wstETH	60%	18%

Collateral factors, and/or reserve factors, may be adjusted from time to time, depending on factors such as the liquidity for a particular asset.