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Lesson 14 / 21 · Expert

LTV, liquidation and nonlinear losses

Work through a hypothetical balance sheet without taking a loan.

14 MIN WITH PRACTICEREAD → TRY → REFLECTNO WALLET NEEDED

By the end, you’ll be able to…

  • Calculate LTV and equity in a stated scenario.
  • Explain why a threshold is not a safe operating target.
Your learning map

Three questions to carry into this lesson.

01Calculate LTV and equity in a stated scenario.
02Explain why a threshold is not a safe operating target.
Use these goals to guide your reading. Try the paper exercise, then explain the result in your own words.

Put numerator and denominator in the same unit

Loan-to-value is debt divided by the oracle-valued collateral. With hypothetical debt of 6,000 units and collateral worth 10,000 units, LTV is 60%. Equity before costs is 4,000 units. These figures are classroom assumptions, not a live market, recommended position or assessment of someone’s account.

A price decline changes the ratio quickly

If collateral value falls 20% to 8,000 while debt stays 6,000, LTV becomes 75% and equity falls to 2,000. Equity has fallen 50%, before interest or liquidation costs. In an imaginary market with an 86% liquidation threshold, the initial difference of 26 percentage points is not a 26% collateral-price cushion. The simplified threshold value is 6,000 / 0.86, approximately 6,977.

Real execution adds uncertainty

Morpho positions can become liquidatable when their contract-defined LTV exceeds the market’s LLTV. Interest, oracle changes, transaction delays and liquidation incentives affect outcomes. A displayed healthy ratio is only an observation under its inputs. Automated alerts can fail, and a plan that assumes an instant top-up during stress may not be executable. This lesson teaches arithmetic and failure analysis; it does not recommend borrowing, a leverage ratio or a particular response to a live position.

Your turn / A paper experiment

Practice on paper

Using the same fictional debt of 6,000, calculate LTV if collateral falls to 6,000. What happened to equity before fees?

I’ve tried it — show the worked answer

LTV is 100%, and collateral minus debt is zero. A real protocol may have allowed liquidation earlier. This simplified endpoint is not a prediction of the actual liquidation amount or remaining balance.

Want to explore with buttons and instant feedback? Try the practice lab ↗

Think it through

Make a choice. Discover why.

Choose an answer and check the explanation. You can retry as often as you like. These are practice questions, not a test of mastery; answers are not saved or sent.

1. Is a 26-point difference between LTV and LLTV a 26% price cushion?
  • Yes
  • No
Read the explanation

No. The ratio changes as the collateral denominator changes.

2. Can interest raise LTV even with an unchanged collateral price?
  • Yes
  • No
Read the explanation

Yes. Increasing debt raises the numerator.

One idea to take with you

Calculate the stressed balance sheet, not just the initial ratio.

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