Collateral Cap

A collateral cap is a limit on the total amount of a particular asset that a lender or lending protocol will accept as collateral. In DeFi lending markets, governance sets caps for each token so that, if its price collapses or is manipulated, the protocol's losses are limited. Without caps, an attacker could deposit a large amount of a thinly traded token, push up its price and borrow more valuable assets against it, leaving bad debt behind. Caps work alongside each asset's collateral factor, which limits how much can be borrowed per unit of collateral; protocols also use supply caps and borrow caps for the same purpose. In traditional finance, similar limits appear as a collateral concentration limit. Also see Collateral Haircut.