Hey Anon! Excited about Pike but not sure where to start?
Lucky for you, we're launching a fresh series on Twitter called Lending, Simplified!
We'll cover the basics of lending and how you can leverage your capital to earn without selling.
Today's episode: What is LTV??
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1/ Starting off with a quick introduction; DeFi lending is the process of supplying capital to borrow money on a Smart Contract-based money market.
Capital can be in the form of a stable coin, volatile asset, or an LP token from a position inside a liquidity pool!
2/ The assets that you supply will influence the amount you are allowed to borrow. This is where we meet LTV - or Loan to Value. LTV is the ratio of assets you can borrow depending on the collateral type.
3/ When designing these lending markets, the creators will decide on safe LTV ratios for different assets.
LTV ratios often change over time as markets mature or degrade, and are usually controlled by Governance.
4/ But a user won't always be shown this LTV ratio - so how can you safely take out a loan without risking it all?
Enter: the Health Factor
5/ Every protocol's health factor can be calculated differently, but at Pike, we use a 0-100 based system.
100 would be an entirely healthy loan, so no debt.
On the flipside, a value closer to 1 is considered unhealthy, and will also be shown in red!
6/ So lets think of an example...
Imagine you supplied $20 to Pike's ETH market, and you wanted to use ALL of it to borrow OP.
When creating the loan, you might see a health factor of 2.67, but what happens when the value of ETH drops?
7/ If your collateral falls in value, you will notice the health factor begin drop. If the health of your loan falls below 2, it will turn RED!
This is a warning from the protocol to either add more collateral and cover your loan, or pay back debts before liquidation.
8/ Speaking of liquidation - Pike won't liquidate accounts until that account reaches a health factor of 1 or less.
And yes, that's per account, not individual collateral position. Why does this matter?
9/ Because of Pike's cross-chain design, your collateral on Arbitrum may actually help offset the falling price of your collateral on Ethereum, therefore keeping your loan healthy!
10/ So wrapping things up, how can you stay safe when lending? Respect the health factor!
LTV works behind the scenes to drive the health factor, but that's only per-market.
Instead, Pike displays a health factor, which provides an aggregate score of your cross-chain lending!