Morpho Blue LLTV vs Liquidation Incentive

In Morpho Blue, LLTV sets the debt limit used to test liquidation eligibility. The liquidation incentive factor (LIF) sets the collateral exchanged during an eligible liquidation. In the pinned implementation, exact integer debt-limit equality is healthy. An 86% LLTV produces a LIF of about 1.0438413, or a 4.3841% bonus before amount rounding, subject to a 1.15 factor cap.

A liquidation calculation therefore needs two separate answers: whether the transaction is permitted, and how much collateral changes hands. Reading the LLTV percentage as the liquidation penalty confuses those steps. Rounding the incentive to a convenient whole percentage can also distort the transfer you expect.

This article follows ordinary liquidation in Blue's variable-rate isolated markets, using the official repository at commit 8e26ca6a8dbc, checked on 28 October 2026. Vault V1/V2 accounting, Midnight fixed-rate markets and optional pre-liquidation extensions require their own rules. The example below is a constructed fixture, without a claim that its configuration is deployed.

LLTV determines eligibility at a particular state

Actual loan-to-value, or LTV, is debt divided by collateral value in the loan token. LLTV is the market's fixed liquidation loan-to-value parameter. Blue identifies a market through five parameters: loan token, collateral token, oracle, interest rate model and LLTV. The Blue contract reference documents that market identity and its state fields.

For an ordinary positive-debt position, reconstruct three integers. First convert the borrower's debt shares into loan-token base units, rounding up. Then value the collateral through the market oracle, rounding down. Finally multiply that collateral value by LLTV, again rounding down, to obtain the maximum supported debt.

The pinned health check returns healthy when maximum supported debt is greater than or equal to calculated debt. Its liquidation entrypoint requires the opposite result and accrues interest before checking.

This resolves a documentation edge case. The current developer liquidation page describes eligibility with a greater-than-or-equal comparison of LTV and LLTV. For the pinned code, use the integer comparison above. A rounded screen showing exactly 86.00% cannot establish which side of it a position occupies.

The broader LTV versus liquidation-threshold example uses Aave's separate borrowing and liquidation parameters. Blue's health calculation here uses the market's LLTV directly; an Aave-style gap between two configured percentages should not be assumed.

The incentive formula converts LLTV into a different percentage

Write LLTV as a fraction, so 86% becomes 0.86. The conceptual formula documented in Morpho's liquidation explanation is:

LIF = min(1.15, 1 / (0.7 + 0.3 × LLTV)).

An equivalent denominator is 1 − 0.3 × (1 − LLTV). The pinned constants set the cursor to 0.3 and maximum factor to 1.15, both scaled by 10^18. A factor of 1.15 means a maximum nominal bonus of 15% relative to repayment value.

The bonus percentage is (LIF − 1) × 100%. It is measured against the debt repayment, while a collateral purchase discount uses the larger collateral value as its denominator.

These are formula inputs, rather than a list of currently enabled markets. As LLTV rises, the calculated incentive falls. In continuous arithmetic, the 1.15 cap binds at LLTVs at or below approximately 56.5217%; use staged integer arithmetic to resolve the precise boundary.

At 86%, the denominator is 0.958. The exact contract-scaled factor is 1,043,841,336,116,910,229, representing 1.043841336116910229. Some documentation examples round this to 1.05. That approximation is unsuitable for reconstructing actual transfers.

For exact reproduction, the contract first rounds the cursor multiplication down, subtracts it from 10^18, divides 10^36 by that denominator with downward rounding, and applies the cap. The fixed-point math library defines those operations. Collapsing them into one floating-point expression can change a base-unit result.

Reconcile a partial liquidation in native units

Assume hypothetical collateral token C and loan token L both have six decimals. The borrower has 100 C. The oracle values each C at 100 L, giving collateral value of 10,000 L. LLTV is 86%, and the borrower owes 8,700 L after interest accrual. There are no other borrowers in this illustrative market.

At this snapshot, maximum supported debt is 8,600 L. Debt exceeds it by 100 L, so the position is eligible. Its LTV is 87%. If debt instead equaled exactly 8,600 L under these same exact conversions, it would be healthy; one additional loan-token base unit would cross the integer boundary.

For a reproducible share conversion, set total borrow assets to 8,700,000,000 raw L units and total borrow shares to 8,700,000,000,000,000. The borrower holds all those shares. Blue's share math adds one virtual asset and 1,000,000 virtual shares. These fixture totals make the conversion exactly one raw L unit per million debt shares, even after including those constants.

The liquidator specifies repayment of 2,000,000,000,000,000 shares. This extinguishes 2,000 L and leaves 6,700 L of debt. All values below use one unchanged oracle observation and no additional accrual within the operation.

The transfer follows two floors after the shares-to-assets conversion. Multiply 2,000,000,000 raw L units by the scaled LIF, then divide by 10^18 with downward rounding. This produces 2,087,682,672 raw L units. Converting that value at 100 L per C and flooring produces 20,876,826 raw C units, displayed as 20.876826 C.

At the unchanged oracle price, the gross extra collateral is worth 87.6826 L. This is the borrower's penalty relative to the debt extinguished. The borrower's collateral-minus-debt value falls from 1,300 L to 1,212.3174 L, a decline of exactly 87.6826 L in this fixture.

The remaining collateral is worth 7,912.3174 L. Applying LLTV and flooring gives supported debt of 6,804.592964 L, above the remaining 6,700 L debt. The resulting LTV is approximately 84.6781%, so this particular partial liquidation restores health.

Using a rounded 5% incentive would instead predict seizure of 21 C. That overstates this fixture's collateral transfer by 0.123174 C, worth 12.3174 L. The initial eligibility decision would still be correct; its transfer calculation would be wrong.

The amount input determines the rounding path

Blue's liquidation interface takes either collateral assets to seize or debt shares to repay, with exactly one input zero. Asking for more collateral or borrow shares than the position contains can revert. Ordinary Blue liquidation has no fixed percentage close factor; sufficient collateral and valid amounts still constrain a full repayment.

With the repayment-shares input used above, collateral is calculated from the downward-rounded asset equivalent of those shares. The loan tokens actually collected use their upward-rounded asset equivalent. In our deliberately exact fixture the two equivalents match.

A nonintegral exchange rate can separate them. For example, with total borrow assets of 1,000,000,001 raw units, total borrow shares of 1,000,000,000,000,000 and repayment shares of 123,456,789,000,000, the virtual-unit conversions give 123,456,789 assets rounded down and 123,456,790 rounded up. The collateral calculation starts from the former; the liquidator pays the latter. These are accounting integers before any token-decimal display.

With a collateral-assets input, the calculation proceeds in the other direction: collateral value rounds up, division by the factor rounds up, and conversion to repayment shares rounds up. Reconstruct the selected path instead of multiplying the final payment by LIF and expecting exact collateral equality.

The same attention to units matters in the Aave scaled-balance ledger, although Blue uses internal borrow shares and virtual-unit conversions here. An Aave supply-income index is not an input to this calculation.

A nominal bonus does not establish realized profit

Morpho's liquidation overview assigns the incentive to the liquidator without a protocol deduction from that incentive. The 87.6826 L above is still only an oracle-valued gross uplift. Selling 20.876826 C can produce a different amount after price impact, swap fees, gas and funding costs.

Likewise, permission to liquidate does not guarantee prompt execution or a successful transaction. A competing repayment or collateral change can invalidate the amounts before inclusion. A borrower may also have insufficient collateral to fund repayment plus the incentive. When liquidation exhausts collateral, the pinned core accounts for residual bad debt separately; that remainder is not cash received from the liquidator.

Validate the threshold and transfer separately

Begin with the chain, Blue address and market ID. Recover its five parameters, token decimals, borrower shares and collateral, market totals, observation block and timestamp. The oracle-scaling walkthrough explains how a raw oracle price translates collateral base units into loan-token base units; a displayed dollar price is insufficient for this check.

Include debt accrued to the transaction's timestamp using that market's actual interest rate model. Stored totals can lag accrual. For the clean fixture above, the supplied totals already represent the accrued state. Lending collateral also belongs in its own column: collateral versus interest-earning supply explains why supplying loan assets and supplying borrowing collateral have different effects.

First reproduce debt and the floored LLTV debt limit, comparing exact integers. Then calculate the capped factor and replay the requested amount through the correct rounding path. Finally reconcile the confirmed liquidation's repaid assets, repaid shares and seized collateral with the remaining position.

Retain both the eligibility result and the transfer ledger. A correct threshold test cannot validate a rounded bonus calculation, and an attractive nominal bonus cannot prove that a liquidation transaction will succeed.