Why does institutional crypto-backed lending use conservative LTVs?
Why does institutional crypto-backed lending use conservative LTVs?
Because crypto is volatile and liquidations aren't instant or free, and a conservative loan-to-value ratio is what keeps a sharp price move from turning a good loan into an unrecoverable one. The conservatism isn't caution for its own sake; it's sized directly against how the collateral actually behaves in a crisis.
A conservative LTV, lending well below the collateral's current value, creates a buffer that has to absorb three things at once when markets move against a position. First, the price drop itself: crypto can fall sharply and quickly, and the buffer has to survive a large move without the loan going underwater. Second, the market impact of the liquidation: selling seized collateral into a falling market pushes the price down further, so the buffer has to cover not just the price at the moment of liquidation but the worse price the sale itself causes. Third, execution latency: there's always some gap between a liquidation triggering and actually completing, and the price can keep falling during that gap.
A high LTV leaves too little room for all of that. If you lend at 90% of a volatile asset's value, a modest drop erases the cushion, and by the time liquidation executes into a thin, falling market, the recovery can fall short of the loan, producing bad debt. Every major DeFi lending failure traces back to some version of this: a buffer sized for ordinary conditions rather than for a fast, correlated crash.
Conservative LTVs are the cost of durability. They mean borrowers can draw less per dollar of collateral, which is less capital-efficient, but they're what lets the lending market survive the exact scenario, a sudden, sharp, liquidity-draining crash, that destroys aggressive lenders. For institutional capital, surviving that scenario is non-negotiable, which is why the conservatism is a feature, not a limitation.
Related: Overcollateralization in institutional crypto-backed lending and What is a liquidation in DeFi.