# Risk Management

Solera is built with a strong commitment to **protocol stability** and leverages industry-leading practices to mitigate risks associated with lending and borrowing. This section outlines key risk management features integrated into the protocol.

**Risk Parameters**

Each asset in the Solera platform is assigned specific **risk parameters** that influence its use in lending and borrowing. These parameters are designed to address security, market volatility, and governance risks. **V1** introduces advanced risk controls to facilitate the inclusion of higher-risk assets with clear limits.

Solera uses **over-collateralization** to safeguard the protocol against market volatility. If the collateral value of a loan drops below the set **liquidation threshold**, a portion of the collateral is liquidated to maintain solvency. Each asset in Solera’s markets is added through **governance proposals** or by admins appointed by governance, ensuring thorough vetting.

**Key Risk Parameters:**

* **Supply Caps**: Set a limit on the total supply of an asset, balancing liquidity with protocol risk.
* **Borrow Caps**: Prevent excessive borrowing of an asset, minimizing insolvency risks.

**Liquidation Parameters:**

* **Liquidation Threshold**: Defines as the maximum loan-to-value (LTV) a loan becomes at risk of liquidation based on the collateral ratio. When the loan's value exceeds this threshold, a portion of the collateral is sold to maintain balance.
* **Liquidation Penalty**: A fee applied during liquidation awarded to the liquidator.

**Health Factor**

The **Health Factor** measures the risk level of an account by comparing its collateral value to the borrowed amount. A **Health Factor** below 1 signals that an account is under-collateralized, triggering potential liquidation to safeguard the protocol.

**Reserve Factor**

A portion of the interest earned by the protocol is allocated to its **ecosystem treasury** through the **Reserve Factor**, which varies based on asset risk. This reserve supports protocol sustainability and future development.

**Collateral Usage**

Some assets, due to risks like centralization or low liquidity, are restricted to specific markets or have lower LTV limits. For example, highly centralized assets are limited to **Isolation Mode**, while stable assets like USDC or ETH enjoy higher LTV ratios. The allowed criteria for each pool can be viewed in the Solera app.

Solera’s risk parameters are dynamic, adjusting to real-time market conditions to maintain a secure and capital-efficient lending environment.


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