Parameters
This page talks about important parameters related to DeFi Lending/Borrowing
Last updated
This page talks about important parameters related to DeFi Lending/Borrowing
Last updated
The Loan to Value ratio represents the maximum amount you can borrow against your collateral. It's expressed as a percentage of the collateral's value.
For instance, $WETH has an 80% LTV on ZeroLend's Linea Market. Here, you can borrow 0.8 $WETH for every $WETH you deposit as collateral on ZeroLend.
If an asset has an LTV of 75%, you can borrow up to 75% of your collateral's value
Example: With $10,000 worth of ETH as collateral at 75% LTV:
Maximum borrowing capacity = $10,000 × 75% = $7,500
Different assets have different LTV ratios based on their volatility and risk profile
Stablecoins typically have higher LTVs than volatile assets
A key risk metric that represents the safety of your borrowed position relative to your collateral value and liquidation threshold.
Health Factor > 1: Position is safe
Health Factor = 1: Position at liquidation point
Health Factor < 1: Position can be liquidated
Scenario:
Collateral: $10,000 ETH
Liquidation Threshold: 82%
Borrowed: $7,000 USDC
Measures how much available capital in a lending pool is currently being borrowed.
Influences interest rates dynamically
Higher utilization → Higher interest rates
Optimal utilization target: 80%
The interest rate model adjusts to maintain balanced utilization
Low utilization (<80%): Gradual APY increase
High utilization (>80%): Steep APY increase to encourage repayments
Maximum utilization (>95%): Emergency APY levels
The Liquidation Threshold is the percentage at which your position becomes eligible for liquidation. It's always higher than the LTV to provide a safety buffer.
For example, on ZeroLend's Linea Market, the liquidation threshold for $WETH loans is 82.50%. If your $WETH debt value becomes worth 82.50% of your deposited collateral, the protocol can sell the collateral to repay the loan.
Represents the maximum ratio of borrowed amount to collateral before liquidation
Creates a safety margin between maximum borrowing capacity and liquidation point
Example: If ETH has:
LTV: 75%
Liquidation Threshold: 82% This creates a 7% buffer zone between maximum borrowing and liquidation
A fee charged during liquidation events is added to the amount that must be repaid.
This is the percentage of funds currently being borrowed compared to the total funds available. For example, a utilization rate of 82.34% means that out of all the funds available to be lent out, 82.34% are currently borrowed by users. This rate can affect the interest rates charged on the loans. The higher the utilization rate, the higher the interest rates, as the demand for the funds is higher relative to the supply.
The health factor indicates the liquidation risk. A health factor above 1 means you are not at immediate liquidation risk. If the health factor falls below 1, the loan is undercollateralized and may be liquidated. You can check your loan's health factor under your ZeroLend 'Dashboard.'
Health Factor > 1: Position is safe
Health Factor = 1: Position at liquidation point
Health Factor < 1: Position can be liquidated
Measures how much of the available capital in a lending pool is currently being borrowed.
Influences interest rates dynamically
Higher utilization → Higher interest rates
Optimal utilization target: 80%
The interest rate model adjusts to maintain balanced utilization
Low utilization (<80%): Gradual APY increase
High utilization (>80%): Steep APY increase to encourage repayments
Maximum utilization (>95%): Emergency APY levels
The Liquidation Threshold is the percentage at which your position becomes eligible for liquidation. It's always higher than the LTV to provide a safety buffer.
Represents the maximum ratio of the borrowed amount to collateral before liquidationCreates a safety margin between maximum borrowing capacity and liquidation point
Example: If ETH has:
LTV: 75%
Liquidation Threshold: 82% This creates a 7% buffer zone between maximum borrowing and liquidation
Typically ranges from 5% to 15% depending on asset risk
Applied to the portion of the position being liquidated
Covers protocol risks and incentivizes liquidators
Borrowed Amount: $1,000
Liquidation Penalty: 10%
During liquidation, borrower loses:
A fee charged during liquidation events, added to the amount that needs to be repaid.
Typically ranges from 5% to 15% depending on asset risk
Applied to the portion of the position being liquidated
Covers protocol risks and incentivizes liquidators
Example:
Borrowed Amount: $1,000
Liquidation Penalty: 10% During liquidation, the borrower loses:
The position becomes eligible for liquidation when Health Factor < 1
Liquidators can repay part or all of the borrowed amount
Liquidators receive collateral at a discount (Liquidation Penalty)
Original borrower loses collateral equal to:
Monitor Health Factor:
Recommended: Keep Health Factor > 1.5
Critical Zone: Health Factor < 1.2
Danger Zone: Health Factor < 1.1
Risk Mitigation Strategies:
Maintain lower LTV than the maximum allowed
Diversify collateral types
Set up Health Factor alerts
Keep additional collateral ready
Actions to Improve Health Factor:
Repay part of the borrowed amount
Add more collateral
Swap to more stable collateral assets
Proactive Monitoring:
Regular Health Factor checks
Price movement alerts
Market volatility awareness
Safety Buffers:
Maintain Health Factor > 1.5
Keep emergency funds available
Use stablecoins for lower volatility
Emergency Actions:
Flash loan options for quick repayment
Collateral swaps to stable assets
Partial position closure
