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Loan to value (LTV) Meaning

A financial ratio that compares the amount of a loan to the value of the asset used as collateral. It is calculated by dividing the loan amount by the collateral value (e.g., $50 loan / $100 collateral = 50% LTV).

This ratio is the primary tool for measuring the risk of a loan. In decentralized lending, LTV determines how much you can borrow.

If you deposit $1,000 of ETH and the protocol has an 80% LTV, you can borrow up to $800 in stablecoins. The "Liquidation Threshold" is usually slightly higher (e.g., 85%); if your LTV hits that number because the price of ETH dropped, your collateral will be sold.

Maintaining a "Healthy LTV" is the responsibility of the borrower. Most experienced users "over-collateralize" their loans-keeping their LTV at 40% or 50%-to give themselves a "safety buffer" in case the market becomes volatile, preventing accidental liquidation.

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