Over the past three days, we've unlocked some powerful financial tools. We’ve learned to earn passive income by lending and access instant liquidity by borrowing. We’ve even demystified the fluctuating interest rates. But with great power comes the need for great responsibility. Today, we're talking about the most important topic for anyone who borrows in DeFi: safety.
The biggest risk a borrower faces is something called "liquidation." It sounds intimidating, but my goal today is to make it simple to understand and even simpler to avoid. The good news is that the Dolomite platform gives you a clear and powerful tool designed to protect you, and it’s called the Health Score. Think of it as your personal safety gauge for everything you do on the platform.
What is Liquidation?
Let's get this out of the way first. In simple terms, liquidation is a forced sale of your collateral.
When you borrow on Dolomite, you have to supply other assets as collateral (your security deposit). The protocol needs to ensure that the value of your collateral is always worth more than the value of your loan. If the market moves against you and your collateral's value drops too close to your loan's value, the system automatically sells your collateral to repay the loan.
This is a built-in safety mechanism that keeps the entire Dolomite protocol healthy and solvent. But for you as a borrower, it's an outcome you want to avoid at all costs, as you lose your assets and often pay a penalty.
Your Shield: The Dolomite Health Score
This is where your most important tool comes into play. Instead of forcing you to do complex math, Dolomite combines all the risk factors into one single, easy-to-understand number: your Health Score.
What it is: The Health Score is a number that represents the safety of your loan.
How it works: A high Health Score (say, 2.0 and above) means you are very safe. As the score gets closer to 1.0, you are entering the danger zone. If it ever hits 1.0, your position is eligible for liquidation.
What affects it: Your score can drop for two main reasons: 1) The value of your collateral goes down, or 2) The value of the asset you borrowed goes up.
Your job as a responsible borrower is simply to keep this number high.
How to Stay Safe: 3 Golden Rules
Managing your risk on the platform is straightforward. You have three main ways to keep your Health Score high and healthy:
Don’t Borrow to the Max: When you go to borrow, the platform will show you a maximum amount you can borrow. A smart user never gets close to this limit. By borrowing less, you create a large safety cushion for your Health Score.
Add More Collateral: If you see market volatility and your Health Score starts to dip, you can easily strengthen your position by supplying more collateral to the platform.
Repay a Portion of Your Loan: The other way to instantly improve your Health Score is to pay back some of what you borrowed. This reduces your debt and increases your safety margin.
By providing these clear options, Dolomite empowers you to be in full control of your risk. Day 4 is all about understanding that while borrowing is a fantastic tool, it must be used wisely. The Health Score feature makes that wisdom accessible to everyone.
Tomorrow, we’ll take a tour of the different assets available on the platform and why they were chosen.
Learn more at @Dolomite
