Glossary · L
LTV (Loan-to-Value)
The ratio of the amount borrowed to the value of the collateral, expressed as a percentage. LTV = (borrow amount ÷ collateral value) × 100. A lower LTV means more overcollateralisation and lower liquidation risk. Most DeFi lending protocols set maximum LTV ratios by collateral type (e.g., ETH max LTV of 80% on Aave) and liquidate positions where LTV exceeds the liquidation threshold.
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How LTV works in practice
LTV is debt divided by collateral value, expressed as a percentage. Protocols publish a maximum LTV for borrowing and a higher liquidation threshold at which the position becomes liquidatable — the gap between them is the buffer you have to work with.
Worked example
Depositing 10,000 of ETH into a market with 80% max LTV lets you borrow 8,000. If the liquidation threshold is 85%, the position is liquidated once debt reaches 85% of collateral — which happens if collateral falls to about 9,412 while the debt stays at 8,000, a fall of under 6%.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
Confusing maximum LTV with liquidation threshold. They are different numbers, and the distance between them is thinner than most people assume. Borrowing at the maximum leaves a single-digit percentage of headroom.
LTV: common questions
- What is LTV?
- The ratio of the amount borrowed to the value of the collateral, expressed as a percentage. LTV = (borrow amount ÷ collateral value) × 100. A lower LTV means more overcollateralisation and lower liquidation risk. Most DeFi lending protocols set maximum LTV ratios by collateral type (e.g., ETH max LTV of 80% on Aave) and liquidate positions where LTV exceeds the liquidation threshold.
- How does LTV work in practice?
- LTV is debt divided by collateral value, expressed as a percentage. Protocols publish a maximum LTV for borrowing and a higher liquidation threshold at which the position becomes liquidatable — the gap between them is the buffer you have to work with.
- Can you give an example of LTV?
- Depositing 10,000 of ETH into a market with 80% max LTV lets you borrow 8,000. If the liquidation threshold is 85%, the position is liquidated once debt reaches 85% of collateral — which happens if collateral falls to about 9,412 while the debt stays at 8,000, a fall of under 6%.
- What do people get wrong about LTV?
- Confusing maximum LTV with liquidation threshold. They are different numbers, and the distance between them is thinner than most people assume. Borrowing at the maximum leaves a single-digit percentage of headroom.