# Risks, LTVs, Liquidations and more

#### **Liquidations**

When a collateral's price drops, there is a risk that the borrower's collateral value will fall below the borrowed amount. This would result in a loss for the lender. To prevent this, lending protocols implement liquidation mechanisms.

When a position becomes unhealthy (borrower's LTV reaches a certain threshold), a liquidator—which can be anyone—can repay the borrower's debt in exchange for their collateral by executing a liquidation instruction on-chain.

A liquidation penalty incentivizes liquidators to act quickly on unhealthy positions. This penalty, calculated as a percentage of the borrower's collateral, goes to the liquidator. Since this represents a direct loss for borrowers, it's crucial to monitor your position's health and LTV ratios to avoid liquidations.

To prevent liquidation of a risky position, you can either increase your collateral by depositing more funds or reduce your debt. In some cases, it may be strategic to sell some collateral to pay down debt—even if the collateral's price has decreased—as this could help you avoid larger liquidation penalties if prices continue to fall.

The protocol and users are protected by different LTV levels.

#### **LTV levels**

Each asset on Texture has three LTV levels:

1. **Maximum Borrow LTV:** This determines how much you can borrow against your collateral. For example, with $1,000 worth of SOL and a maximum LTV of 80%, you can borrow up to 800 USDC, even if liquidation occurs at a higher LTV. For positions with multiple collateral types, the maximum borrow amount is calculated using size-weighted LTVs of each collateral.
2. **Partly Unhealthy LTV:** At this level, your position becomes eligible for partial liquidation. When this occurs, only a specific portion of your collateral—defined by the *Partial Liquidation Factor*—can be liquidated to reduce the LTV. This factor varies by asset.
3. **Fully Unhealthy LTV:** At this level, liquidators can perform either partial or full liquidation of your position to protect the pool's health and depositors' funds.

*<mark style="background-color:green;">How is Maximum Borrow LTV calculated when I have several collaterals with different LTVs?</mark>*

As mentioned above, when you have multiple collaterals, the LTV is calculated as the size-weighted average of each collateral's LTV. Here's an example to illustrate.

Let's say a pool supports SOL and cbBTC as collateral for borrowing USDC. The *MaxBorrowLTV* for SOL is 70% and for cbBTC is 85%. A user deposits $100 worth of SOL and $50 of cbBTC as collateral.

In this case, the maximum Borrow LTV for the user's position would be:

`(100/150) × 70% + (50/150) × 85% = 75%`

This same weighted average calculation applies to determining the user's Partly Unhealthy and Fully Unhealthy LTVs.

### **Bad debt**

Bad debt occurs when a borrower's position cannot be fully liquidated, meaning the borrower still has outstanding debt after all collateral has been liquidated.

Texture socializes bad debt, which means the amount of bad debt results in a proportional reduction of liquidity in the affected reserve (lenders in that token receive a proportional haircut). To prevent manipulation and related attacks, only the pool curator can write off bad debt.

Typically, bad debt occurs during sudden price drops when liquidations cannot be performed quickly enough. One of the key risk management goals is to prevent bad debt by setting risk parameters (LTVs and others) at levels that protect depositors' funds even under extreme market conditions.