Overcollateralization
Overcollateralization means users must lock up more collateral value than the amount they borrow. For example, to borrow $1,000, a user might need to lock up $1,500 worth of ETH. This excess acts as a buffer to protect lenders and the protocol against market volatility, ensuring positions remain solvent even if asset prices fall.
If the value of the user’s collateral declines, the Loan-to-Value (LTV) ratio of the position increases. When the LTV approaches the Liquidation Loan-To-Value (LLTV) threshold, the position becomes at risk of liquidation. To avoid liquidation, users can monitor their position and take preemptive actions such as adding more collateral or repaying part of their debt. If alerts are enabled on Tenor, users will be notified when their position's health begins to deteriorate, allowing them to act in time.
Loan-To-Value (LTV)
The LTV is a ratio that measures the proportion of debt relative to collateral value. The formula to calculate the LTV of a position is:
Liquidation Loan-To-Value (LLTV)
The Liquidation Loan-to-Value (LLTV) is the maximum LTV a position can reach before it becomes eligible for liquidation. If the LTV of a position is greater than the LLTV, it is subject to liquidation. The LLTV is a fixed, immutable parameter for each market.