A crypto lending vault lets you borrow against eligible crypto collateral. The protocol tracks the debt and collateral value, and if the position crosses its liquidation boundary, a third party may repay some debt in exchange for collateral and an incentive. The boundary, interest, and liquidation mechanics depend on the specific protocol and market.
What a crypto lending vault does
In a lending protocol, you supply an eligible asset and may designate it as collateral. You can then borrow another supported asset against it. The collateral secures the debt; it does not mean you can borrow its full market value. Each asset and market has rules that limit borrowing power.
For example, Aave V3 lets users supply assets and, where supported, choose whether to use them as collateral. Borrowed balances accrue interest. Aave says borrowing rates are dynamic and influenced by utilization and governance-set parameters, so a rate should not be treated as a permanent fixed cost. See Aave’s risk and borrowing documentation and Aave’s interest-rate documentation.
How collateral, LTV, and liquidation limits fit together
LTV measures debt against collateral
Loan-to-value (LTV) is the value of the debt divided by the value of the collateral. If debt rises or collateral value falls, LTV rises and the position becomes riskier. A protocol’s maximum borrowing limit is not necessarily its liquidation boundary: protocols can set distinct asset-specific LTV and liquidation-threshold values.
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Protocols use different safety measures
Aave summarizes account-level risk with a health factor. Its documented formula is total collateral value multiplied by the weighted average liquidation threshold, divided by total borrow value. In that model, a health factor below 1 indicates that the position is eligible for liquidation.
Morpho uses LLTV, or liquidation loan-to-value. A position becomes eligible when its debt-to-collateral LTV reaches or exceeds the LLTV set for that market. These measures describe related risks, but the terms and settings are protocol-specific; do not apply one protocol’s threshold or terminology to another. See Aave’s documentation and Morpho’s liquidation documentation.
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What can make a position eligible for liquidation?
- Collateral falls in value: the same debt is now backed by less value.
- The borrowed asset rises relative to the collateral: the debt’s value grows compared with its backing.
- Interest accrues: the debt balance can grow even if market prices do not move.
- An oracle reports a changed or incorrect value: protocols use price oracles to value collateral and debt. Aave warns that oracle failure or compromise can lead to incorrect valuations; Morpho says displayed LTV and health depend directly on oracle reliability.
These factors can combine. A position that appears comfortably below its limit can become unsafe as prices change or interest accumulates. Oracle-related risks are documented by Aave and Morpho.
What happens during liquidation?
When a position meets the protocol’s liquidation conditions, a permissionless liquidator may act. The liquidator repays debt and receives collateral, generally with a protocol-defined incentive or bonus. Liquidation is an execution mechanism, not a promise that the borrower will get time to add collateral first.
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The amount that can be repaid and the collateral transferred depend on the protocol’s rules. Aave documents repayment limits that can depend on position size and health factor. Morpho describes direct execution by the first liquidator to act rather than an auction. Parameters and mechanics vary by protocol and market; see Aave’s liquidation documentation and Morpho’s liquidation documentation.
Liquidation may not fully cover the loan if collateral loses value very rapidly. Morpho’s documentation cautions: “In extreme cases where the collateral’s value drops so fast that it becomes less than the debt (`LTV > 100%`), a liquidation might not cover the full loan.”
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What to check before borrowing
There is no universal safe LTV, liquidation bonus, or interest rate. Before opening or managing a position, examine the live settings for the exact protocol deployment, asset pair, and market:
- Which asset you supply as collateral and which asset you borrow.
- The maximum LTV and the liquidation threshold—or the market’s LLTV, where that is the relevant measure.
- How the borrowing rate changes with utilization and protocol parameters.
- Which oracle values the assets and what the protocol documents about oracle failure.
- The liquidation incentive, repayment limits or close-factor rules, and execution mechanics.
- Whether risk is isolated to one market or shared across pooled assets.
Protocol parameters can change through governance and differ by asset and deployment. Official documentation available on October 7, 2026 describes the mechanics, but it should not be read as a live parameter table or current recommendation. Check the market’s current configuration rather than relying on an example or a figure from another market.
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