Loan-to-Value
Loan-to-value (LTV) is the size of a loan expressed as a percentage of the value of the collateral behind it. Lenders set a maximum LTV that caps how much you can borrow against a given deposit.
Three numbers that are easy to mix up
Your current LTV is simply your debt divided by your collateral value. The maximum LTV is the highest ratio a lender or protocol lets you open, so it defines your borrowing limit. The liquidation threshold is a higher ratio at which your position can be liquidated, meaning the collateral is partly sold to repay the loan.
The one-line definition often used for LTV, the maximum share of collateral you can borrow, describes the maximum LTV. The current LTV moves with prices every second, which is why it matters more once a loan is open.
A worked example
Say you deposit 1 ETH worth 2,000 dollars on a lending protocol with a maximum LTV of 75% and a liquidation threshold of 80%. You could borrow up to 1,500 USDC. You choose 1,000 USDC, so your current LTV is 50%. If ETH falls to 1,250 dollars, your LTV becomes 80% and the position can be liquidated, usually with a penalty that costs you part of your collateral.
Why lenders use LTV
Crypto collateral can fall in value quickly, so loans are overcollateralized: you must deposit more than you borrow. A lower maximum LTV gives the lender a bigger cushion. Volatile assets therefore tend to have lower limits than stablecoins or major coins, and both centralized lenders and DeFi protocols publish their parameters per asset.
Risks and common mistakes
Borrowing right up to the maximum leaves almost no room for price moves, so a small drop can push you over the liquidation threshold. Interest also accrues, slowly raising your debt and your LTV even when prices are flat. If you borrow a volatile asset rather than a stablecoin, a rise in that asset increases your LTV too.
Protocols can change parameters through governance, and price oracles can briefly report wrong values. Monitoring your position and keeping a buffer below the threshold are the usual defences.
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Frequently asked questions
Is a lower LTV safer?
Yes, for the borrower it means a larger cushion before liquidation, though it also means borrowing less against the same collateral.
What is the difference between LTV and health factor?
LTV compares debt with collateral value. The health factor, used by protocols such as Aave, compares the liquidation threshold with your debt and signals liquidation when it falls below 1.
Can my LTV change without me doing anything?
Yes. Collateral price moves, the price of the borrowed asset and accruing interest all change it continuously.
Related terms
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