Overcollateralization

The Tenor protocol requires borrowers to overcollateralize their positions such that the value of the collateral assets locked must be greater than the value of the debts. This mechanism generally protects lenders' capital from the risk of borrower default. The maximum quantity of loan assets that can be borrowed is determined by the Liquidation Loan-To-Value (LLTV) of the Tenor Market. For example, if a Tenor Market has a LLTV of 80%, a borrower can borrow up to 80% of the value of the collateral assets deposited.

If the ratio betweem the value of the borrower's loan and the value of the borrower's collateral (Loan-To-Value) is greater than the LLTV, the position is subject to liquidation.

Note that if liquidations are unable to recover the amount of debt borrowed, the market will incur bad debt and lenders will suffer a loss. Bad debt in Tenor market is not socialized, such that the last lender in the market will incur the bad debt losses.