Loan-to-value (LTV) is the percentage of your collateral’s value that you’re allowed to borrow against in a DeFi lending protocol — if you deposit $1,000 of ETH and the maximum LTV is 75%, you can borrow up to $750. LTV is the foundational risk parameter governing DeFi lending: it sets an explicit ceiling on leverage, protects the protocol from bad debt, and directly determines how much buffer exists before a position gets liquidated. Every major DeFi lending protocol — Aave, Compound, MakerDAO, Morpho — uses LTV (or an equivalent ratio) as the core risk control mechanism for borrowing.
Maximum LTV vs. Liquidation Threshold
DeFi protocols define two distinct LTV-related numbers for each collateral asset:
| Parameter | What It Means | Typical ETH Example (Aave v3) |
|---|---|---|
| Maximum LTV | How much you can initially borrow | 80% |
| Liquidation Threshold | At what point your position is liquidated | 82.5% |
| Liquidation Bonus | Penalty paid to liquidators when seized | 5% |
The gap between maximum LTV and liquidation threshold is a safety buffer. If you borrow at exactly 80% LTV and the collateral drops slightly, you don’t immediately get liquidated — the protocol waits until the effective LTV hits 82.5% (the liquidation threshold). This buffer exists because instant-liquidation at the borrowing limit would make DeFi lending impractical.
How LTV Is Calculated
Current LTV = (Outstanding Loan Value ÷ Collateral Value) × 100
Example
| Scenario | Collateral | Loan | LTV |
|---|---|---|---|
| Initial deposit | 1 ETH = $3,000 | $2,400 USDC | 80% (at max LTV) |
| ETH drops 10% | 1 ETH = $2,700 | $2,400 USDC | 88.9% — above liquidation threshold, liquidatable |
| ETH rises 20% | 1 ETH = $3,600 | $2,400 USDC | 66.7% — healthy |
| Borrower repays $600 | 1 ETH = $3,000 | $1,800 USDC | 60% — safer |
LTV by Asset Class
LTV limits vary by asset based on liquidity, volatility, and market depth. More liquid, less volatile assets get higher LTV limits:
| Asset Type | Typical Max LTV Range | Rationale |
|---|---|---|
| Major stablecoins (USDC, DAI) | 75–90% | Low volatility; deep liquidity |
| Blue-chip crypto (ETH, BTC) | 65–82% | Liquid but volatile |
| Mid-cap tokens (LINK, UNI) | 50–72% | Less liquid; higher IL risk |
| Long-tail / illiquid tokens | 20–50% | High slippage; liquidation is hard |
| Isolated market assets | 0–70% | Varies; often lower for new listings |
Aave v3 introduced Supply and Borrow Caps alongside LTV — limiting total protocol exposure to any single asset even if individual position LTVs are within bounds.
LTV vs. Collateralization Ratio
MakerDAO and some other protocols express this in inverse form — as a collateralization ratio (CR):
CR = (Collateral Value ÷ Loan Value) × 100
A 75% max LTV = a 133% minimum collateralization ratio (you must have $133 of collateral for every $100 borrowed).
| Max LTV | Equivalent Min Collateral Ratio |
|---|---|
| 50% | 200% |
| 66.7% | 150% |
| 75% | 133% |
| 80% | 125% |
| 90% | 111% |
Maker’s DAI vaults historically required 150–175% minimum collateralization for ETH-backed positions, which corresponds to ~57–67% max LTV.
LTV in Practice: Key Risk Scenarios
1. Borrowing Too Close to Maximum LTV
If you borrow at 79% LTV on an 80% max / 82.5% liquidation threshold asset, a single price candle dropping ~4% puts you below the liquidation threshold. Most DeFi users aim for 50–65% effective LTV to leave a meaningful buffer.
2. Multi-Collateral Positions
When using multiple collateral assets (Aave v3 supports this), the protocol calculates a weighted average LTV based on the proportion and LTV cap of each asset:
- 50% of collateral in ETH (80% max LTV) + 50% in LINK (70% max LTV) → weighted max LTV ≈ 75%
3. Interest Accrual Over Time
Borrowed balances grow as interest accrues. A position opened at 70% LTV might silently drift to 73%, then 77% over months of accrued interest without the borrower noticing — especially if collateral price is stable and there’s no alert set.
Protocol LTV Parameters (2025)
| Protocol | ETH Max LTV | ETH Liquidation Threshold |
|---|---|---|
| Aave v3 (Ethereum) | 80% | 82.5% |
| Compound v3 | 82% | 85% (supply cap based) |
| Spark Protocol | 80% | 82.5% |
| Morpho (Aave markets) | Inherits Aave | Inherits Aave |
| MakerDAO (stETH vault) | ~74% (equiv.) | ~77% (equiv.) |