Liquidation Threshold

Your collateral doesn't disappear all at once — it disappears at a number. That number is the liquidation threshold: the exact LTV ratio where a protocol stops waiting and starts selling.

Borrowers care because crossing that line means losing collateral, often at a discount, with no warning call. Lenders care because the threshold is what keeps the protocol solvent when prices drop fast.

How It Works

Say you deposit $10,000 in ETH and borrow $6,000 in USDC. Your starting LTV is 60%. If the protocol's liquidation threshold is 80%, you have room to absorb a price drop before anything happens — but not unlimited room.

If ETH drops enough that your $10,000 collateral is now worth $7,500, your LTV climbs to 80%. At that exact point, the protocol triggers liquidation. A liquidator — usually a bot — repays part of your debt and claims a chunk of your collateral at a discount as a reward.

The liquidation threshold is always higher than the maximum LTV you're allowed to borrow at. That gap is intentional — it's the protocol's buffer. Borrow at 60%, get liquidated at 80%. The spread is what keeps the math from breaking.

Why It Matters

Crypto prices move faster than any loan officer can react. A 20% ETH drop in an hour isn't unusual. If your LTV is already sitting at 75% and the threshold is 80%, that move wipes you out before you can top up your collateral.

The threshold also varies by asset. Stablecoins collateralizing stablecoin debt might carry an 85% threshold. Volatile assets like smaller altcoins might sit at 65%. The protocol is pricing in how fast it could go wrong.

What to Watch

The most common mistake is confusing the maximum LTV with the liquidation threshold. They are not the same number. You might be allowed to borrow up to 75% LTV, but liquidation doesn't trigger until 82%. That gap is your safety buffer — and most borrowers never calculate how much price movement it actually buys them.

Liquidation doesn't just close your position — it penalizes you. Liquidators receive a bonus, typically 5–10% of the liquidated amount, taken from your collateral. You lose more than just the debt repayment. Staying well below the threshold isn't conservative — it's basic math.