DeFi Lending & Borrowing: LTV and Interest Rates Explained
One of the core promises of DeFi is "Bankless" finance. Protocols like Aave and Compound allow anyone to borrow money without a credit check, using their crypto as collateral. But to do this safely, you must understand the Loan-to-Value (LTV) Ratio.
How Decentralized Lending Works
In DeFi, all loans are Over-Collateralized. If you want to borrow $1,000 in stablecoins, you might have to provide $1,500 in Ethereum as "Insurance" for the lender.
Why Borrow Instead of Selling?
- Avoid Taxes: Selling crypto is a taxable event. Borrowing against it is not.
- Unlock Liquidity: You can keep your exposure to Bitcoin's growth while using the borrowed money to pay bills or buy more assets.
Understanding LTV (Loan-to-Value)
The LTV determines how much you can borrow.
- Max LTV: If the Max LTV is 80%, you can borrow $80 for every $100 you deposit.
- Liquidation Threshold: If the value of your collateral drops so much that your LTV exceeds this threshold (e.g., 85%), your position is Liquidated to repay the lender.
The "Health Factor"
Most protocols give you a Health Factor score.
- > 1.0: You are safe.
- < 1.0: You are about to be liquidated.
Managing Interest Rates (APY)
In DeFi, interest rates are Dynamic. They change based on the supply and demand of the specific asset.
1. Borowing Rate
What you pay the protocol. When a pool is near 100% "utilization," the rate skyrockets to encourage borrowers to pay back.
2. Supply Rate
What you earn for lending. This is a great way to earn Passive Income on your stablecoins.
The Risks: Don't Get Caught in a "Wick"
Crypto is volatile. If the price of your collateral drops 10% in a minute, your Health Factor could drop below 1.0. Always leave a significant "Buffer" (e.g., only borrow 50% of your max) to survive a Flash Crash.
Plan Your Loan
Don't guess your safety margin. Use our Lending & Borrowing Calculator to see your exact LTV, Health Factor, and daily interest costs.