LTV Calculation, or Loan-to-Value calculation, is a financial metric used to assess the risk associated with a collateralized loan by comparing the loan amount to the fair market value of the collateral. In crypto lending and decentralized finance (DeFi), it determines the maximum amount of cryptocurrency that can be borrowed against deposited digital assets. Its fundamental purpose is to quantify collateral adequacy and manage lending risk.
Mechanism
The calculation involves dividing the outstanding loan principal by the current market value of the collateral, expressed as a percentage. In DeFi protocols, this process is automated via smart contracts that continuously monitor the real-time value of collateral using oracle data feeds. If the LTV ratio exceeds a predefined threshold due to price fluctuations, the mechanism automatically triggers a liquidation event to protect the lender’s capital.
Methodology
The strategic application of LTV calculation is central to the design of robust and solvent decentralized lending platforms. By dynamically adjusting borrowing limits and initiating liquidations based on this ratio, protocols manage systemic risk, prevent under-collateralization, and maintain capital efficiency. This ensures the integrity of the lending system and provides clear parameters for institutional participants engaged in crypto-backed borrowing and lending activities.
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