Close Factor

Breakdown of Close Factor parameter utility and methodology

Utility

Close factor corresponds to the maximum amount of an outstanding borrow that can be closed in a single liquidation event.

The parameter is set globally for the protocol, just like the liquidation incentive setting.

Methodology

From a risk management perspective, the close factor needs to be high enough to incentivize small liquidations to be carried, but not too high to avoid penalizing violators too heavily.