Loan-to-value

Reading depth

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BeginnerCore purpose and mental modelPractitionerAdds mechanisms and economicsEngineer or auditorAdds state and verification

Dependency check

Advanced detail assumes prerequisite knowledge

Before using practitioner mechanisms or engineer and auditor checks, review any unfamiliar dependency. These paths come from canonical depends_on relationships; Web3 Academy does not track completed lessons.

Review 7 dependencies

• AssetRequired through Collateral

  1. Loan-to-value
  2. Collateral
  3. Asset

• ClaimRequired through Asset versus claim

  1. Loan-to-value
  2. Collateral
  3. Asset versus claim
  4. Claim

• TokenRequired through Asset versus claim

  1. Loan-to-value
  2. Collateral
  3. Asset versus claim
  4. Token

• Asset versus claimRequired through Collateral

  1. Loan-to-value
  2. Collateral
  3. Asset versus claim

• Claim tokenRequired through Lending pool

  1. Loan-to-value
  2. Lending pool
  3. Claim token

• CollateralDirect prerequisite

  1. Loan-to-value
  2. Collateral

• Lending poolDirect prerequisite

  1. Loan-to-value
  2. Lending pool

Loan-to-value is the ratio of debt value to collateral value under a stated price, eligibility, and aggregation model.

Category: LendingSplit balance category cue

System record

Start with the economic purpose, participants, resources, and entitlements before studying implementation detail.

Why it exists

Loan-to-value gives borrowers and protocols a comparable measure of leverage and remaining borrowing capacity before a position reaches configured limits.

Traditional-finance analogy

Mortgage or secured-loan LTV is the closest comparison recorded for this concept.

Where the analogy stops

• DeFi LTV can change continuously with oracle prices and accrued debt, and protocols may use separate maximum-borrow and liquidation thresholds.
• Multi-asset systems can apply asset-specific factors and aggregation rules, so one displayed ratio may hide heterogeneous collateral and debt risks.

Main actors

• ActorBorrower
• ActorLending pool or creditor
• ActorOracle
• ActorGovernance or risk administrator

Assets and claims

Assets — controlled or transformed resources

Assets are resources the mechanism moves, holds, values, or transforms.

• AssetCollateral assets valued in a reference unit
• AssetBorrowed assets valued in the same reference unit

Claims — entitlements and corresponding dependencies

Claims are rights to value, repayment, redemption, control, or another party's performance; each depends on an obligation or system that must honor it.

• ClaimBorrower debt obligation
• ClaimCreditor's collateral claim

Loan-to-value, or LTV, compares debt value with collateral value under one stated valuation and eligibility model.

Why it exists

Token amounts with different units cannot be compared directly. LTV converts collateral and debt to one reference unit and expresses leverage as a ratio. It helps limit new borrowing and shows how price or interest changes consume a buffer.

Traditional-finance analogy

Mortgage LTV is the direct analogy. In DeFi, collateral and debt prices can change continuously, debt accrues programmatically, and protocols may use separate thresholds for new borrowing and liquidation. Multi-asset factors can make a displayed aggregate ratio less informative than its components.

Formula and units

collateralValueUsd = collateralAmount × collateralPriceUsd
loanToValue = debtValueUsd / collateralValueUsd

Both values use USD in this example, so LTV is a unitless fraction. 0.60 is 60%; it is not the number 60 and not 6,000 basis points unless converted explicitly. Positive debt with zero credited collateral is unsafe, not a valid division result.

Step-by-step LTV calculation

1. Inventory eligible collateral and outstanding debt with explicit token amounts and decimal scales.
2. Convert every amount to one stated reference unit using compatible price directions and observations.
3. Sum credited collateral value under the selected eligibility and haircut model.
4. Sum debt value, including accrued interest and any model-defined obligations.
5. Divide debt value by collateral value, handling zero collateral as an explicit unsafe boundary.
6. Compare current LTV with the maximum-borrow and liquidation thresholds, then recompute after every state or price change.

Maximum LTV is not liquidation threshold

Table: Maximum LTV is not liquidation threshold

Parameter	Purpose	Typical action at the boundary
Current LTV	Reports current leverage	None by itself
Maximum borrow LTV	Limits new debt or collateral withdrawal	Reject risk-increasing action
Liquidation threshold	Defines when liquidation can begin	Permit liquidation

The gap between borrowing and liquidation boundaries is a buffer for price movement and interest. Exact names and behavior vary by protocol.

State changes

Table: State changes

Event	Debt value	Collateral value	LTV direction, all else equal
Borrow more	Rises	Unchanged	Rises
Repay	Falls	Unchanged	Falls
Add collateral	Unchanged	Rises	Falls
Remove collateral	Unchanged	Falls	Rises
Collateral price falls	Unchanged	Falls	Rises
Interest accrues	Rises	Unchanged	Rises

Capital flow is borrowing, repayment, and collateral movement. Information flow is prices and factors. Claim flow is the borrower debt paired with the creditor’s collateral and repayment rights; computing LTV creates no additional claim. Return flow does not originate in the ratio, although borrower interest can increase debt and therefore LTV. Risk flow reaches the borrower when LTV approaches liquidation and reaches suppliers when recovery value becomes insufficient.

Return source and loss allocation

LTV produces no return. It constrains how much borrowed purchasing power a borrower receives. The borrower pays interest and loses collateral first during liquidation; any shortfall follows the pool’s reserve and supplier loss rules.

Engineer or auditor lens

Test compatible units, price direction, decimals, zero collateral, multiple assets, eligibility, haircuts, debt indices, rounding, stale prices, same-block state changes, maximum-LTV enforcement, and separation from liquidation thresholds. Use validated fraction constructors rather than mixing percentages, fractions, and basis points.

Compound III’s collateral documentation is one primary example of separate factors for borrowing and liquidation. Its parameters and aggregation model are protocol-specific. The documentation was reviewed 2026-08-10.

Common misunderstandings

• “60% LTV means 60 tokens of debt.” LTV is a unitless ratio of reference values.
• “Maximum LTV is the liquidation threshold.” Protocols can and often do separate them.
• “LTV changes only when prices change.” Borrowing, repayment, collateral movement, and interest also change it.

Continue with the protocol-defined health factor.

Machine-readable model

Key equations

Canonical expressions come from the structured concept record. KaTeX renders the notation, while the plain-text expression and variable table keep its meaning and units inspectable without JavaScript. Read the narrative above for the model's domain, assumptions, and rounding rules.

1. Equation 1

   $$\mathrm{loanToValue} = \frac{\mathrm{debtValue}}{\mathrm{collateralValue}}$$

   Plain-text equation: loanToValue = debtValue / collateralValue

   Variables and units for equation 1

   Symbol	Meaning	Unit
   loanToValue	Loan To Value	dimensionless fraction (1 = 100%)
   debtValue	Debt Value	selected valuation unit (for example, USD)
   collateralValue	Collateral Value	selected valuation unit (for example, USD)

Assurance contract

Security properties

These structured statements define desired behavior. Their stable IDs can bind tests, invariants, specifications, audit findings, or proof results without turning descriptive review advice into an assurance claim.

Desired · not evaluated: No test, audit, or proof result is implied until scoped evidence is linked to this property.

1. SP-01Desired · not evaluated

   Debt and collateral values use compatible units, price times, decimals, eligibility, and aggregation rules

2. SP-02Desired · not evaluated

   Zero collateral with positive debt is handled as an unsafe position rather than division by zero

3. SP-03Desired · not evaluated

   Additional borrowing is rejected when it would exceed maximum LTV

4. SP-04Desired · not evaluated

   Repayment, collateral changes, and interest update LTV from reconciled state

Prerequisites

Direct dependencies recorded by this concept's canonicaldepends_on relationships.

• CollateralPath 15

  Collateral is an asset or claim pledged under rules that let a creditor restrict, seize, or sell it when an obligation becomes unsafe or unpaid.

• Lending poolPath 16

  A lending pool aggregates supplied assets, issues supplier claims, and makes available liquidity borrowable under interest and risk rules.

Learn next

Concepts that directly depend on this one, ranked by the recommended learning path. Check each page for additional prerequisites.

• Health factorPath 18

  A health factor is a protocol-defined ratio or score that summarizes how much liquidation-adjusted collateral supports a borrower's debt.

Knowledge check

Quiz

Answer in your own words, then open the model answer.

What problem does Loan-to-value exist to address?

Model answer

Loan-to-value gives borrowers and protocols a comparable measure of leverage and remaining borrowing capacity before a position reaches configured limits.

Mark as understood