What Is a 'Liquidation Threshold' and How Does It Differ from the Initial LTV? ⎊ Path

What Is a ‘Liquidation Threshold’ and How Does It Differ from the Initial LTV?

The initial Loan-to-Value (LTV) ratio is the percentage of collateral value a user can borrow when they first open a position. For example, a 75% LTV means borrowing $75 against $100 of collateral.

The liquidation threshold is a higher LTV percentage that, if breached, triggers the liquidation of the collateral. For instance, the liquidation threshold might be 80%.

This gap between the initial LTV and the liquidation threshold provides a buffer zone, giving the borrower time to add more collateral or repay part of the loan if the collateral’s value decreases.

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Glossar

Threshold

Barrier ⎊ A threshold, within cryptocurrency derivatives and options trading, fundamentally represents a price level that must be breached for a contract to become active or trigger a specific outcome.

Liquidation Threshold

Threshold ⎊ The liquidation threshold, within cryptocurrency derivatives and options trading, represents a pre-defined price level at which a trader's collateral is forcibly liquidated to cover potential losses.