What is loan-to-value (LTV)?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 4 min
In short
Loan-to-value is the ratio of what you have borrowed to what your collateral is worth. Protocols set two of them per asset: the maximum you may borrow at, and the higher level at which liquidation begins. Borrowing right up to the maximum leaves almost no distance between the two.
Key points
- Debt divided by collateral value
- The borrowing cap and the liquidation level are different numbers
- Volatile collateral carries a lower cap
- Borrowing at the cap leaves no room before liquidation
Definition
The ratio of outstanding debt to collateral value, used by protocols to set both the maximum permitted borrowing and the level at which liquidation is triggered, asset by asset.
Borrow ¥500,000 against ¥1,000,000 of ETH and your LTV is 50%. If the protocol's cap is 80%, you could in principle borrow ¥800,000 — but if liquidation starts at 85%, borrowing to the cap means a roughly 6% fall in collateral value puts you in liquidation range. The gap between those two numbers is your real buffer.
Caps differ by asset because volatility and liquidity differ. Stablecoins get high caps; small-cap tokens get low ones. The question behind the number is whether the collateral could actually be sold in a crash, and governance revisits these parameters as conditions change.
In practice, running close to the cap means constant management: every price move forces a decision to top up or repay, and an overnight drop cannot be answered at all. Keeping LTV low borrows less but buys a lot of distance before liquidation. Which trade-off fits depends on what the borrowed funds are for.
Watch out for
- · Borrowing at the cap leaves only a sliver of price movement before liquidation
- · Caps can be lowered by governance or in response to market conditions
- · With mixed collateral the test applies to the whole basket, and individual moves do not reliably offset each other