Bands
When a loan is created in the defi.money protocol, the collateral for that loan gets spread out in a number of price bands in a liquidity pool, each band representing a different price segment. You can think of it as pouring your collateral into multiple ordered columns with staggered prices. Each band represents a portion of the collateral that would get traded at a particular price point if the price of the collateral reaches there.
By splitting the collateral into bands, loans don't have to be fully liquidated if the price of the collateral reaches the liquidation price (as in other lending protocols), as the liquidation price is instead "spread out" in a range to lower the risk. The bands don't get permanently sold as well, as they can be traded back into the collateral as in an AMM liquidity pool, depending on which direction the price moves. This protects users against short-term price volatility that otherwise could instantly liquidate and close their loan leading to an instant loss. This is why it is called Collateral conversion, as the collateral can be converted back and forth.
Can the bands change by themselves?
Yes, as you accrue interest over time due to the borrow rate, your bands (your conversion range), shifts slowly upwards to account for the added debt. The speed at which this occurs is dependent on the borrow rate: at a low borrow rate the effect is less noticable, and at a high borrow rate it is more noticable. It is recommended to pay extra attention to this effect if your loan health is low, if you do not wish to enter loan conversion.
How many bands?
By default, newly created loans have their collateral split into 10 bands. This means that if the price of the collateral enters the first band in the Collateral conversion range for that particular loan, 1/10th of the collateral could be converted to ensure the loan remains backed by enough value. This can then change depending on the movement of the price, so your collateral could be 20%, 30%, 40% etc. converted, or back to 0%.
You might prefer a different number of bands when you create a loan, and this is possible to manually change by toggling on the Pro mode:
The minimum amount of bands you can set is 4, and the maximum is 50.
Why adjust the number of bands?
You can change the number of bands if you wish to anywhere between 4 and 50, although if you are not sure it is recommended to keep the default 10. By reducing the number of bands you do increase your capital efficiency (you can borrow slightly more $MONEY relative to the collateral value), but the trade-off is that bigger chunks of your collateral can be converted at once if the price of the collateral moves down into your bands. More bands on the other hand does the opposite, where conversion happens at a finer level but makes capital efficiency slightly lower. This makes a higher band amount more suitable for long-term set-and-forget type of loans (the default 10 is suitable for most use-cases), and vice versa.
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