Loan-to-Value (LTV)

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.)

See Also