Modulis 3 · DeFi lending

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Collateral — what it is and why you need it

After this module

You'll learn to unlock liquidity against your SOL or ETH without selling it — and control the risk yourself through a single number, LTV. Liquidation will stop being a looming threat: you'll know its price in advance and know exactly which LTV is worth holding.

Imagine you want to borrow money from a bank. The bank asks: "What will you give as a guarantee?" You say: "My house." The bank agrees and gives you the loan.

DeFi lending (borrowing) works exactly the same way. Except instead of a house — you hand over cryptocurrency. And instead of a bank — everything runs through a computer program (a smart contract — self-executing code that follows rules known in advance, applied identically to everyone).

The house analogy — how it works

A simple analogy

Imagine your house is worth $200,000. The bank says: "Fine, I'll lend you $140,000, because your house is worth enough." If you don't repay — the bank takes the house. DeFi works identically, just faster and without the paperwork.

	Bank loan	DeFi lending
Collateral (what you give)	House ($200,000)	126 SOL ($11,088)
Loan (what you get)	$140,000	4,704 USDC
Who values it	An appraiser	Smart contract (every second)
Interest	4–6% per year	~5–7% per year (variable)
How long it takes	2–4 weeks	10 seconds
If you don't repay	Bailiff (6–12 months)	Automatic (within seconds)
Runs 24/7	No	Yes

The core idea

At a bank you "lock up" a house to get a loan. In DeFi you "lock up" cryptocurrency (SOL or ETH) and get stablecoins (USDC). The principle is the same. Only the speed and accessibility differ.

LTV — the most important number to know

LTV (Loan-to-Value) means: how much you owe compared to what you put up as collateral. It's the debt-to-asset ratio.

The LTV analogy

If your house is worth $100,000 and your loan is $30,000 — your LTV is 30%. That means your debt is 30% of your asset's value. The lower the LTV, the safer you are.

The LTV formula

LTV = Debt value / Collateral value

Example:

Collateral: 126 SOL at $88 = $11,088
Debt: 4,704 USDC = $4,704
LTV = $4,704 / $11,088 = 42.4%

That means your debt is 42.4% of your collateral. The remaining 57.6% is your safety "cushion".

Weighted margin — a more precise version of LTV

DeFi protocols calculate things a bit more strictly. They use weighted margin — a formula with built-in safety coefficients:

Weighted LTV = (Debt × 1.05) / (Collateral × Price × 0.90)

What this means in plain terms:

× 1.05 — the system values your debt as 5% larger (to be safe)
× 0.90 — the system values your collateral as 10% smaller

Example:

Collateral: 126 SOL × $88 × 0.90 = $9,979
Debt: 4,704 × 1.05 = $4,939
Weighted LTV = $4,939 / $9,979 = 49.5%

Why does this matter?

The simple formula shows 42.4%, while the system calculates 49.5%. That's the same number the protocol itself sees — which is exactly why you keep an eye on it. Watching the weighted LTV means you see your position exactly as the smart contract sees it: no surprises.

The color system — how to know if you're safe

Think of it like a traffic light. Green = safe. Red = danger.

Our strategy's starting LTV — the safe zone

45%

55%

65%

71%

100%

Above is a real LTV gauge, identical to the one on the Kamino or Aave dashboard. The needle points to 42% (our strategy's starting LTV). It's green up to 45%, then moves through yellow, orange, red, and above 71% — liquidation. This gauge is your dashboard: one glance, and you know what to do.

LTV level	Color	What it means	What to do
≤ 45%	Green	Calm zone	Check weekly
46–55%	Yellow	Worth watching	Check daily
56–65%	Orange	Time to act	Start reducing debt
66–71%	Red	Act now	Repay debt or add collateral
> 71%	Black	Liquidation	The system sells your assets

Why is 30% the calm zone?

If your LTV is 30%, the SOL price needs to drop about 58% to reach the liquidation threshold. That means:

SOL at $88 now → liquidation only around ~$37
That's a very large buffer. Even during the biggest crashes, it's rare for prices to fall that far.

If your LTV is 55%, the buffer is narrower — a 22% drop is enough, and swings that size can happen quickly in crypto markets. But here's the key point: you choose how wide that buffer is when you decide how much to borrow. The liquidation price is known in advance — which is why choosing 30% LTV is a deliberate decision, made so you can sleep soundly.

Why is DeFi lending better than a bank?

6 reasons to choose DeFi

Speed: A loan in 10 seconds. Not a month.
Always open: 24 hours a day, 7 days a week.
Transparent: All the rules are visible in the code. No hidden terms.
No credit history needed: Your collateral is your credit.
Flexible repayment: Repay any time, in parts, with no penalties.
Collateral earns: Your SOL generates ~6% a year. At a bank, your house earns nothing while it's pledged.

How we use this in our strategies

Strategy A — SOL/ETH Covered Call + LP

SOL Kamino

You deposit SOL as collateral into Kamino SOL (for an ETH position — Aave ETH)
SOL earns ~6% a year from day one (ETH on Aave earns ~2–3%)
Keep LTV around ~30% (a safe level)
Use the borrowed USDC for other yield strategies

Strategy B — Multi-Layer Yield

SOL Kamino

SOL as collateral at ~42% LTV
Borrow USDC (the largest regulated stablecoin on Solana — you pay ~5-7% interest)
Weighted margin: collateral × 0.90, debt × 1.05
Liquidation only at ~71% — a large distance away

A numbers example — $10,000

Say you have $10,000 worth of SOL (113.6 SOL at $88):

Parameter	30% LTV	42% LTV	55% LTV
Collateral value	$10,000	$10,000	$10,000
Debt amount	$3,000	$4,200	$5,500
Drop needed to reach danger	−58% ($37)	−41% ($52)	−23% ($68)
Risk	Low	Medium	High
Capital available to use	$3,000	$4,200	$5,500

The golden rule

Start with 30% LTV. That means less capital put to work, but a huge safety "cushion" and calm sleep. Once you're managing the position confidently and checking it regularly, you can move to 42%+. Starting at 30% is a deliberate decision, not caution born from fear.

Try it yourself

LTV Kalkuliatorius

SOL/ETH kiekis

11,000

Dabartinė kaina (USD)

$1$500

Skolos dydis (USDC)

$0$50,000

Weighted LTV

49.5%

Pavojus

0%30%45%55%71%

Užstato vertė

$11,088

Paprastas LTV

42.4%

Likvidacijos kaina

$61.35

Saugumo buferis

30.3%

Formulės

Weighted LTV = ($4,704 x 1.05) / (126 x $88 x 0.90) = 49.5%

Likvidacijos kaina = ($4,704 x 1.05) / (126 x 0.90 x 0.71) = $61.35

Buferis = ($88 - $61.35) / $88 = 30.3%

Glossary

Term	What it means, simply
Collateral	The asset you put up as a guarantee for a loan
LTV	How much you owe compared to what you put up as collateral (as a percentage)
Weighted margin	A stricter version of LTV with safety coefficients
Liquidation	When the system automatically sells your collateral
Buffer	The distance between your current situation and the danger zone
Lending APY	The interest your collateral earns per year

In short

Collateral = a guarantee, just like a house for a bank. You give crypto, you get a loan.
LTV = Debt / Collateral — the lower, the safer.
Weighted margin — your real LTV is higher than the simple version. Watch that one.
30% LTV — the safest starting level.
DeFi lending is faster, more transparent, and more accessible than a bank.
Your collateral earns interest even while it's "locked up".

Quick check

What does LTV = 42% mean?

Practice task

0 / 5

Calculate your hypothetical LTV

Understanding LTV is the foundation of every lending strategy. This task takes about 5 minutes, and afterward you'll know how much borrowing would be safe in YOUR scenario. No real money needed.

This is a paper exercise — no real money and no connecting to any protocol required. You'll get ready for actual borrowing only once you have a full plan (lesson 3-5).

This is learning, not investing — use only small amounts you treat as tuition.

You just calculated the weighted LTV and liquidation price for three scenarios — the same number the Kamino smart contract uses. Most people borrow without ever understanding this.

Crypto taxes and companies Liquidation mechanics