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Sikh Bitcoin · Expert · Lesson 14 of 21

LTV, liquidation and nonlinear losses

Work through a hypothetical balance sheet without taking a loan.

About 14 minutes with practice. You only need something to take notes with. No real wallet details or payments are part of this lesson.

Course contents · Lesson 14 of 21
  1. Threat model before tools
  2. Design a custody architecture
  3. Entropy, mnemonics and passphrase tradeoffs
  4. Hardware signing and trusted displays
  5. Multisig and independent control
  6. Recovery and continuity across people
  7. Coin control and privacy tradeoffs
  8. Lightning operations and recovery
  9. Payment operations and reconciliation
  10. Native bitcoin and wrapped claims
  11. USDC, reserves and redemption
  12. Identify a Morpho market precisely
  13. Oracles, prices and measurement risk
  14. LTV, liquidation and nonlinear losses
  15. Variable rates and growing debt
  16. Vaults, allocation and exit liquidity
  17. Arc, Base and cross-chain dependencies
  18. Allowances, signing and simulation
  19. Treasury accounting and restricted funds
  20. Incident response with clear human authority
  21. Capstone: a defensible treasury design

What you will learn

  • Calculate LTV and equity in a stated scenario.
  • Explain why a threshold is not a safe operating target.

Put numerator and denominator in the same unit

Loan-to-value is debt divided by the oracle-valued collateral. With hypothetical debt of 6,000 units and collateral worth 10,000 units, LTV is 60%. Equity before costs is 4,000 units. These figures are classroom assumptions, not a live market, recommended position or assessment of someone’s account.

A price decline changes the ratio quickly

If collateral value falls 20% to 8,000 while debt stays 6,000, LTV becomes 75% and equity falls to 2,000. Equity has fallen 50%, before interest or liquidation costs. In an imaginary market with an 86% liquidation threshold, the initial difference of 26 percentage points is not a 26% collateral-price cushion. The simplified threshold value is 6,000 / 0.86, approximately 6,977.

Real execution adds uncertainty

Morpho positions can become liquidatable when their contract-defined LTV exceeds the market’s LLTV. Interest, oracle changes, transaction delays and liquidation incentives affect outcomes. A displayed healthy ratio is only an observation under its inputs. Automated alerts can fail, and a plan that assumes an instant top-up during stress may not be executable. This lesson teaches arithmetic and failure analysis; it does not recommend borrowing, a leverage ratio or a particular response to a live position.

Practice on paper

Using the same fictional debt of 6,000, calculate LTV if collateral falls to 6,000. What happened to equity before fees?

Reveal the worked answer

LTV is 100%, and collateral minus debt is zero. A real protocol may have allowed liquidation earlier. This simplified endpoint is not a prediction of the actual liquidation amount or remaining balance.

Check your understanding

Choose an answer in your head or on paper, then reveal the explanation. Retry whenever you like. Answers are not submitted or scored; completion marks are your own learning notes.

1. Is a 26-point difference between LTV and LLTV a 26% price cushion?

  • Yes
  • No
Reveal answer 1

No. The ratio changes as the collateral denominator changes.

2. Can interest raise LTV even with an unchanged collateral price?

  • Yes
  • No
Reveal answer 2

Yes. Increasing debt raises the numerator.

Take this with you

Calculate the stressed balance sheet, not just the initial ratio.

Your learning, at your pace

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