LTV Ratio

The Loan-to-Value (LTV) ratio is a financial metric that expresses the amount of a loan as a percentage of the value of the collateral pledged. It is the inverse of the collateral ratio.

For instance, an LTV of 60% means that the loan is 60% of the collateral's value. This ratio is used by lenders and protocols to determine the risk of a loan.

A higher LTV ratio indicates a higher risk, as there is less of a buffer against potential collateral price drops. Lenders typically set maximum LTV limits to protect themselves.

If the LTV exceeds this limit, it triggers a margin call or liquidation. Understanding the LTV ratio is essential for borrowers to manage their debt effectively.

It helps them decide how much to borrow and how much collateral to provide. This metric is fundamental to the risk assessment process in both traditional and digital asset lending markets.