# Core Terms

## **Lending Formula**

### **Loan-to-Value (LTV) Ratio**

The core formula used in the protocol is the **Loan-to-Value (LTV)** ratio. The LTV ratio determines how much a borrower can borrow against their collateral. In this protocol, the LTV is capped at **80%**.

### **LTV Formula:**

{% hint style="info" %}
LTV = Loan Amount / (Total Collateral Value \* 80)
{% endhint %}

Where:

* **Loan Amount** is the amount borrowed.
* **Total Collateral Value** is the sum of the values of the assets deposited as collateral.

For example, if a borrower deposits $10,000 worth of ETH and DAI, they can borrow up to **$8,000** (80% of $10,000).

***

### **Health Factor (HF)**:

The health factor is a critical aspect of the protocol’s risk management. It is used to determine whether a borrower’s collateral is still sufficient to cover their loan. The health factor is calculated as:

{% hint style="info" %}
HF = (Collateral Value \* LTV) / Loan Amount
{% endhint %}

* If **HF > 1**, the loan is safe.
* If **HF < 1**, the loan is under-collateralized and eligible for liquidation.

***

### **Liquidation Threshold**:

To prevent abrupt liquidation, a buffer is set in place. The liquidation threshold is **85% LTV**, meaning if the LTV ratio of a loan exceeds 85%, liquidatoin can occur.


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