LLTV

Money markets use a Liquidation Loan-to-Value (LLTV) ratio, which defines the maximum amount that can be borrowed against a given collateral asset. If the collateral’s value falls below the threshold implied by the LLTV, the position becomes eligible for liquidation.

In most systems, any user can act as a liquidator, repaying the debt and seizing collateral in exchange for a bonus (called the liquidation incentive on Morpho). This open-participation model, combined with an automated liquidation mechanism, helps ensure timely liquidations and limits losses and the creation of bad debt. Bad debt arises when the outstanding loan exceeds the value of the posted collateral and the borrower has no incentive to repay.

Markets with lower LLTVs intrinsically reduce the risk of bad debt and typically offer higher liquidation bonuses to liquidators, incentivizing efficient action.

The LLTV criterion increases the Price Fluctuation score by one notch for each step down in LLTV, starting from 94.5%.