In DeFi lending markets with separate borrowing and liquidation limits, maximum loan-to-value (LTV) sets how much new debt collateral can support, while the liquidation threshold helps determine when an existing position becomes eligible for liquidation. Actual position LTV is debt value divided by eligible collateral value. Aave V3 combines collateral assets through value-weighted parameters and a health factor, so exceeding the borrowing limit need not mean liquidation eligibility.
That distinction matters after a loan has opened. A price move can remove permission to borrow more before the account becomes liquidatable. Reading both limits as an instruction to liquidate would misclassify that intermediate state; treating either limit as a recommended borrowing level would assign it a purpose it does not have.
Separate the ratio from the two parameters
“LTV” can refer to an observed ratio or a configured maximum. Write the label in full when comparing them:
| Measure | What it answers | Inputs |
|---|---|---|
| Actual position LTV | How large is existing debt relative to eligible collateral? | Current debt value ÷ current collateral value |
| Maximum borrowing LTV | How much debt may this collateral support for borrowing? | Applicable collateral values and borrowing parameters |
| Liquidation threshold | What collateral weighting applies to the liquidation test? | Applicable collateral values and liquidation parameters |
| Health factor | Does threshold-weighted collateral cover the debt? | Threshold-weighted collateral value ÷ debt value |
Aave's V3 risk methodology distinguishes maximum borrowing LTV from the liquidation threshold and identifies the gap as a protective mechanism. Its account liquidation threshold is weighted by collateral value. These are protocol parameters, rather than a personal loss budget. Aave V3 risk-parameter methodology.
The rest of this article uses an Aave V3-style account model. Other lending systems can use different names, collateral groupings or liquidation rules. A percentage from one implementation should not be pasted into another protocol's calculation.
Rebuild a two-asset collateral ledger
The following account is entirely hypothetical. Assets A, B and D are invented tokens, and every price and percentage is a teaching assumption. None is a current Aave market parameter or a borrowing recommendation.
Assume A and B are both enabled as collateral in one eligible pool, ordinary mode applies, and D is the only borrowed token. Exclude eMode, isolation restrictions, fees, supply-interest growth, rounding and any paused or restricted state. Assume sufficient D liquidity and no binding borrow cap. Use oracle-valued dollars as the common unit, with D initially valued at exactly $1.
| Collateral | Quantity | Oracle price | Value | Maximum LTV | Liquidation threshold |
|---|---|---|---|---|---|
| A | 2 | $2,000 | $4,000 | 70% | 80% |
| B | 10 | $100 | $1,000 | 40% | 60% |
| Total | — | — | $5,000 | — | — |
The modeled borrowing capacity is each collateral value multiplied by its maximum LTV, then added together:
$4,000 × 70% + $1,000 × 40% = $3,200.
The value-weighted maximum LTV is therefore $3,200 ÷ $5,000 = 64%. A simple average of 70% and 40% would give 55%, which ignores that A supplies four fifths of the collateral value.
Calculate the liquidation numerator separately:
$4,000 × 80% + $1,000 × 60% = $3,800.
The weighted liquidation threshold is $3,800 ÷ $5,000 = 76%. The $3,800 is threshold-weighted support for the liquidation calculation; it is not a cash balance or a second deposit.
Now assume an accepted borrow of 3,000 D. Debt value is $3,000, actual LTV is 60%, and modeled borrowing headroom is $200. Health factor is $3,800 ÷ $3,000 = 1.2667.
Aave documents health factor as collateral value multiplied by its weighted liquidation threshold, divided by borrow value. A value below 1 signals liquidation eligibility. That test is distinct from the maximum borrowing LTV comparison. Aave's health-factor explanation.
Follow the loan after A loses value
Keep quantities, D's $1 price and all parameters fixed. Change only A's oracle price. These are separate snapshots of an unchanged loan before any liquidation transaction or corrective action.
| Account measure | A at $2,000 | A at $1,800 | A at $1,490 |
|---|---|---|---|
| Total collateral value | $5,000 | $4,600 | $3,980 |
| Modeled borrowing capacity | $3,200 | $2,920 | $2,486 |
| Existing debt value | $3,000 | $3,000 | $3,000 |
| Actual LTV | 60.00% | 65.22% | 75.38% |
| Weighted maximum LTV | 64.00% | 63.48% | 62.46% |
| Threshold-weighted collateral | $3,800 | $3,480 | $2,984 |
| Weighted liquidation threshold | 76.00% | 75.65% | 74.97% |
| Health factor | 1.2667 | 1.1600 | 0.9947 |
| Modeled state | Borrowing headroom exists | No new borrowing; health factor above 1 | Liquidation eligible |
At $1,800, A contributes $3,600 of collateral value. Borrowing capacity has fallen to $3,600 × 70% + $1,000 × 40% = $2,920. Existing debt exceeds that capacity by $80. Available additional borrowing is zero in this model, rather than a negative amount that must automatically be repaid at once.
The liquidation numerator is still $3,480, so health factor remains 1.16. Exceeding maximum LTV has removed borrowing room without satisfying the below-1 liquidation condition. That intermediate state alone does not establish how much time remains before another price or debt change crosses the liquidation boundary.
At $1,490, A contributes $2,980. Threshold-weighted collateral is $2,980 × 80% + $1,000 × 60% = $2,984. Dividing by $3,000 produces 0.9947. The account is now eligible under the modeled test. The table does not assume a liquidator has acted, how much debt is repaid, or how much collateral is seized.
Notice that the weighted percentages also changed. A now represents a smaller fraction of the collateral basket, giving B's lower parameters more weight. Keeping the original 76% liquidation threshold through every price scenario would overstate this basket's later support.
A liquidation price needs a stated condition
A multi-asset account has a boundary of price combinations. It does not generally have one unconditional liquidation price for A.
Hold B at $100, debt at $3,000 and all quantities and parameters unchanged. The health-factor-1 boundary is reached when A's contribution plus B's $600 contribution equals $3,000. That requires A's collateral value to be $3,000, putting its unit price at $1,500:
2 × $1,500 × 80% + $600 = $3,000.
Now change only the condition for B: let its price be $80. Its threshold-weighted contribution becomes $800 × 60% = $480. A must contribute $2,520, requiring an A price of $1,575. The boundary moved even though A's quantity and liquidation parameter stayed fixed.
Equality is the mathematical boundary here; the documented Aave eligibility condition is below 1. Display rounding can conceal a value just above or below that boundary. Neither $1,500 nor $1,575 is a promised execution price or an estimate of liquidation costs.
The same distinction appears in a different setting in stop loss versus liquidation price: an intended exit, a risk threshold and completed execution are separate facts. A submitted on-chain repayment also needs a confirmed state change before its effect belongs in this ledger.
The denominator can move too
A falling collateral price is only one route toward the boundary. Return to the $1,800-A snapshot, whose liquidation numerator is $3,480.
If the 3,000 borrowed D tokens are instead oracle-valued at $1.02, debt value becomes $3,060 and health factor falls to approximately 1.1373. If accrued interest subsequently increases the debt balance to 3,030 D at that same price, debt value becomes $3,090.60 and health factor falls to approximately 1.1260. The 30-token accrual is an invented scenario, not an implied rate or time period.
Aave's borrowing guide states that interest begins accruing when tokens are borrowed and that rates adjust with utilization. A frozen token balance will eventually diverge from an accruing debt balance. Aave borrowing and interest mechanics. The utilization and borrow-APR ledger separates a rate snapshot from cost accumulated over time.
A hypothetical confirmed repayment of 300 D from the original $1,800-A state would instead leave $2,700 of debt and health factor 1.2889, assuming D remains $1. It changes the denominator; it does not restore A's lost market value. Comparing proposed actions requires rebuilding the resulting account, including the source of repayment funds and any collateral removed to obtain them.
Validate the account that actually governs the loan
A spreadsheet can reconcile the arithmetic while still using the wrong collateral pool. Identify the chain, protocol version, pool, wallet and active mode before combining assets. The funding-boundary method in cross versus isolated margin is useful for that inventory, although an exchange margin setting does not define a DeFi pool's rules.
For Aave V3, getUserAccountData exposes total collateral and debt in the oracle's base currency, available borrowing, account LTV, liquidation threshold and health factor. The Pool documentation also describes collateral enablement, reserve restrictions and eMode-specific parameters. Read the actual deployment's applicable configuration alongside the account values. Aave V3 Pool account and configuration reference.
Keep the returned borrowing LTV parameter separate from the actual debt-to-collateral ratio. The V3 account-calculation implementation weights the collateral parameters to obtain average LTV; it does not calculate that field as debt divided by collateral. Aave V3 account-calculation logic.
Use one observation block where possible, and retain the inputs needed to explain differences:
| Worksheet field | Validation step |
|---|---|
| Account boundary | Confirm chain, pool, wallet, version and mode |
| Eligible collateral | List token balances and whether each contributes to collateral |
| Valuation | Record oracle prices, base currency, decimals and observation block |
| Parameters | Record effective maximum LTV and liquidation threshold for each contribution |
| Debt | Include all borrowed assets, accrued balances and their oracle values |
| Reconciliation | Compare reconstructed totals, weighted threshold and health factor with protocol output |
| Action result | Re-read debt and collateral after a confirmed transaction |
If a system applies a separate recognized-value adjustment, establish where it enters valuation before multiplying by another percentage. The collateral-haircut comparison explains how to avoid counting the same discount twice.
Do not resolve a mismatch by choosing whichever screen looks more reassuring. Check stale observations, disabled collateral, mixed units, omitted debt and mode-specific parameters first. For this worksheet, the useful deliverable is a reproducible account snapshot: current borrowing capacity, current liquidation numerator, current debt, and the exact assumptions under which each changes.