Overcollateralization

The Morpho 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 Morpho Bond. For example, if a Bond has a LLTV of 80%, a borrower can borrow up to 80% of the value of the collateral assets deposited.

If the ratio between 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 Bond will incur bad debt and lenders will suffer a loss.