How Do Lenders Use LTV Ratios to Determine Interest Rates in Traditional and Decentralized Finance?
In traditional finance, a lower LTV ratio is seen as less risky for the lender, and this often results in a lower interest rate for the borrower. A higher LTV implies more risk, so lenders charge a higher interest rate to compensate.
In decentralized finance, the interest rate is typically determined algorithmically based on the supply and demand for borrowing in a specific lending pool, rather than being tied directly to an individual's LTV. However, the protocol's overall risk parameters, which are influenced by LTV, can indirectly affect the cost of borrowing for everyone.
Glossar
Ltv Ratio
Collateralization ⎊ Loan-to-Value ratio, within cryptocurrency and derivatives, represents the proportion of an asset’s value financed by debt, critically influencing risk exposure for both lenders and borrowers.
Interest Rates
Rate ⎊ Within cryptocurrency derivatives, rate dynamics significantly influence option pricing and hedging strategies, particularly concerning perpetual futures and synthetic instruments.
Interest Rate
Yield ⎊ Interest rate, within cryptocurrency derivatives, represents the cost of capital or the return on an underlying asset utilized in constructing a derivative position, impacting pricing models and arbitrage opportunities.