Morpho LLTV and liquidations explained

Every Morpho market has one number that decides when a loan can be liquidated: the LLTV, or liquidation loan-to-value. This guide explains how it works, how the liquidation bonus is worked out, what pre-liquidations are, and what happens when a liquidation leaves bad debt behind.

What LTV and LLTV mean

A loan's LTV, or loan-to-value, compares what you owe with what your collateral is worth:

LTV = debt / collateral value

The collateral is valued in the loan asset by the market's oracle. If you lock up bitcoin worth 100,000 USDC and borrow 60,000 USDC, your LTV is 60%.

The LLTV is the highest LTV a loan may reach. Once the LTV goes above it, the loan can be liquidated. In a market with an 86% LLTV, 100 dollars of collateral can support up to 86 dollars of debt.

Each market's LLTV is chosen when the market is created and can never change. It must be one of the values approved by Morpho governance. At the time of writing these are 0%, 38.5%, 62.5%, 77%, 86%, 91.5%, 94.5%, 96.5% and 98%. Pairs that move together, such as two dollar stablecoins or wstETH and WETH, tend to use high LLTVs. Pairs that can move apart quickly, such as bitcoin and a dollar stablecoin, use lower ones.

No separate borrowing limit

On pooled lenders like Aave there are two numbers: a maximum LTV for opening a loan and a higher liquidation threshold. A Morpho market has only the LLTV. The contract lets you borrow right up to it, and a loan opened at the limit can be liquidated after the smallest price move or a few seconds of interest.

Apps built on Morpho often add their own, lower limits on top. Coinbase does this for its bitcoin-backed loans, as described in Coinbase bitcoin loans explained.

The health factor

Morpho apps summarize a loan's safety in one number:

health factor = collateral value x LLTV / debt

At 1 or above, the loan cannot be liquidated. Below 1, it can. Using the example above in an 86% LLTV market:

100,000 x 0.86 / 60,000 = 1.43

Two shortcuts help for a loan with one volatile collateral and a stablecoin debt:

liquidation price = debt / (collateral amount x LLTV)

price drop to liquidation = 1 - 1 / health factor

Here, with 1 bitcoin as collateral, the liquidation price is 60,000 / 0.86, about 69,770 USDC per bitcoin, a fall of about 30%. Interest adds to the debt every second, so the health factor drifts down even when prices stand still. You can test your own numbers with the liquidation price calculator or look up any address with the wallet checker.

How a liquidation works

Once a loan's LTV is above the LLTV, anyone may liquidate it. Liquidation is a public function of the Morpho contract, and in practice automated bots compete to act first. The liquidator repays some or all of the debt and receives the borrower's collateral in return, plus a bonus. Everything is priced by the market's oracle.

• No warning or grace period. The first valid transaction wins.
• No fixed close factor. A liquidator may repay any part of the debt, up to all of it, in one go.
• No protocol cut. The whole bonus goes to the liquidator.

The liquidation bonus formula

The bonus comes from the liquidation incentive factor, or LIF. It depends only on the market's LLTV:

LIF = min(M, 1 / (beta x LLTV + (1 - beta))), with M = 1.15 and beta = 0.3

So the LIF is never more than 1.15, a 15% bonus. For a liquidator who repays 1,000 USDC, the collateral they receive is worth 1,000 x LIF.

Higher LLTVs get smaller bonuses. That makes sense: a market with a 96.5% LLTV leaves only a thin cushion, and a big bonus would itself push loans underwater. The constants are in the Morpho contract's source code and the liquidation page of the documentation.

In the 86% example, if the price falls and a liquidator repays 10,000 USDC of debt, they take bitcoin worth about 10,438 USDC. The borrower's debt falls by 10,000, so the cost of the liquidation to the borrower is the 438 USDC bonus. Recent events are listed on the liquidations page.

Pre-liquidations: an optional softer path

A borrower can opt in to pre-liquidations through a separate Morpho contract. The borrower picks a pre-liquidation LTV below the market's LLTV. Once the loan passes that level, liquidators may close only a limited part of it, for a bonus the borrower chose in advance. Both the part and the bonus can be set to grow as the LTV gets closer to the LLTV.

The idea is to trim a risky loan in small steps before a full liquidation becomes possible. It is opt-in: the borrower has to authorize the contract, and loans without it follow the standard rules above.

Bad debt: when the collateral runs out

If the collateral price falls fast and far, the debt can grow larger than the collateral can cover once the liquidation bonus is counted. For an 86% LLTV market that happens when the LTV passes 1 / 1.0438, about 95.8%. A liquidator can then take all the collateral while repaying only part of the debt. The leftover debt has nothing behind it. That is bad debt.

Morpho does not leave bad debt sitting on the books. When a liquidation takes the last of a borrower's collateral, the unpaid debt is written off in the same transaction and the market's total supply is cut by the same amount. Every lender in that market loses in proportion to their share. Lenders in other markets are not affected.

How that reaches vault depositors depends on the vault version:

• Vault V1.0: the loss shows up at once as a lower share price for everyone.
• Vault V1.1: the share price does not drop automatically. The loss is still real, and unless someone covers it, the last depositors to withdraw can be left short.
• Vault V2: adapters report the lower value, and the share price falls for all depositors.

Past cases are tracked on the bad debt page, and the wider picture is in Morpho risks explained.