Loan-to-value ratio (LTV)

Just like a mortgage

If you have bought a flat in Iceland, you know the idea. Under the Central Bank of Iceland's 2025 rules, the loan-to-value ratio of a consumer mortgage may not exceed 80% of the market value, or 90% for a first home. Lending services in DeFiDeFi (decentralised finance)Financial services, such as lending, saving and trading, that run on smart contracts on a blockchain instead of through a bank or other middleman. work on the same principle. The difference is that crypto prices can move by tens of percent in a few days, and the loan-to-value ratio moves with them.

The maximum and where you stand

Two numbers matter:

• Maximum LTV tells you how much you can borrow. It is set for each crypto, and assets that swing a lot get a lower maximum.
• Current LTV is where your loan stands at any given moment. It rises if the collateral falls in price or the debt grows with interest.

Example: you put up ether worth US$10,000 and the maximum LTV is 75%. You can then borrow up to US$7,500. If you borrow US$6,000, your current LTV is 60%. If the price of ether falls by a quarter, the collateral is worth US$7,500 and your LTV has risen to 80%.

Services such as Aave also set a higher limit, the liquidation threshold. If the LTV goes above it, LiquidationLiquidationWhen a loan or leveraged position is closed automatically because the collateral or margin no longer covers the debt. can begin. If the liquidation threshold in the example were 80%, a fall of just over a quarter would be enough. The health factorHealth factorA number that shows how well the collateral covers a DeFi loan. If it falls below 1, part of the collateral can be sold to repay the debt. measures the same thing in a different way.