2.2.1 Value of the guarantee

The assets that the protocol owns (represented by ownership of a FLIP) are used as collateral to borrow from the protocol. Each market has a collateral factor, ranging from 0 to 1, which represents the portion of the underlying asset's value that can be borrowed. Small-cap illiquid assets have low collateral factors; they are not a good collateral, whereas large-cap liquid assets have high collateral factors. The sum of the value of the underlying token balances of an account, multiplied by the collateral factors, equals the borrowing capacity of a user. Users can borrow up to, but not exceed, their borrowing capacity, and an account cannot take any action (for example, borrow, transfer the Flip Token guarantee, or redeem the FLIP guarantee) that would raise the total value of assets loaned in excess of its borrowing capacity. ; this protects the protocol from the risk of non-compliance.