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A crypto lending vault lets you borrow against crypto you supply as collateral. The protocol limits borrowing according to the assets and market rules, charges interest on the debt, and can let a third party liquidate collateral if the position crosses a risk threshold. The precise limits and liquidation mechanics depend on the 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 asset against that collateral, up to the borrowing limit set for the relevant assets and market. The supplied collateral supports repayment; it is not simply a deposit that guarantees you can withdraw it at any time while debt remains.
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In Aave V3, supplied assets can optionally be enabled as collateral. Borrowing creates a balance that accrues interest, and borrowing rates are dynamic, influenced by utilization and governance-set parameters. Details vary by deployment and asset. See Aave’s documentation.
How borrowing limits and liquidation thresholds differ
Loan-to-value (LTV) is the value of the debt divided by the value of the collateral. A protocol’s maximum borrowing LTV determines how much you can borrow, while a liquidation threshold marks a separate risk boundary. Reaching the borrowing limit does not necessarily mean the position is immediately liquidatable.
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Aave uses asset-specific LTV and liquidation thresholds and expresses account-level risk as 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 makes the position eligible for liquidation.
Morpho uses LLTV, or liquidation loan-to-value: a position is eligible for liquidation when its debt-to-collateral LTV reaches or exceeds the market’s LLTV. These terms are related, but Aave’s health factor and Morpho’s LLTV are not interchangeable. Use the definitions and settings for the specific protocol and market. See Aave’s documentation and Morpho’s liquidation documentation.
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What can make a position unsafe
- Collateral loses value: the same debt becomes a larger share of the collateral’s value.
- The borrowed asset rises relative to collateral: debt value can increase relative to the assets securing it, even if the collateral price is unchanged.
- Interest adds to the debt: accrued borrowing costs can reduce the safety margin over time.
- Oracle valuations change or fail: protocols rely on oracles to value assets. Aave warns that oracle failure or compromise can produce incorrect valuations; Morpho notes that displayed LTV and health depend on oracle reliability. See Aave’s documentation and Morpho’s oracle documentation.
When and how liquidation happens
When a position crosses the protocol’s liquidation boundary, a permissionless liquidator can act. The liquidator repays some of the debt and receives collateral, generally with a protocol-defined incentive or bonus. This can reduce or close the borrower’s position; it is not a voluntary sale controlled by the borrower.
Execution rules differ. Aave’s liquidation rules include repayment limits that depend on position size and health factor. Morpho describes direct execution by the first liquidator to act, rather than an auction. The applicable incentive, repayment amount and other mechanics depend on the protocol, deployment and market configuration. See Aave’s documentation and Morpho’s liquidation documentation.
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Liquidation does not guarantee full repayment in a severe price move. Morpho’s documentation warns: “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.”
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to check before borrowing
Do not rely on a protocol name or a general rule of thumb to assess a position. Before borrowing, review the settings for the exact market and deployment:
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- Which asset is collateral and which asset is borrowed, and whether the collateral asset is enabled for use.
- The maximum LTV and the liquidation threshold—or LLTV, where that is the market’s measure.
- How the borrowing rate behaves and how utilization affects it.
- Which oracle values the assets and what failure assumptions apply.
- The liquidation incentive, repayment limits or close-factor mechanics, and whether liquidations use an auction or direct execution.
- Whether the market isolates risk to a particular pair or uses pooled exposure across assets.
These values can change with protocol version, market, asset and governance decisions. Check the live configuration rather than treating documentation examples or figures from another market as current settings. The mechanics described here reflect official documentation available on October 7, 2026.
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