Ledger Wallet Loans Leave Wrapped Bitcoin Collateral Exposed to Liquidation

Ledger Wallet’s Crypto Loan feature lets eligible users borrow stablecoins against wrapped Bitcoin tokens, but a loan that crosses its market’s limit can trigger liquidation of the pledged collateral.

The feature rolled out Wednesday, Oct. 21, with four Ethereum pairings: WBTC or cbBTC as collateral, and USD Coin (USDC) or Tether (USDT) as the loan. The collateral is wrapped Bitcoin held on Ethereum, not Bitcoin (BTC) transferred directly from the Bitcoin network. Users choose a collateral and loan pair and set the amount to borrow, subject to eligibility and regional availability. The launch's supported pairs are outlined in earlier coverage of Ledger's loan feature.

Each Morpho market has its own collateral and loan assets, price oracle and liquidation loan-to-value (LTV) threshold. LTV compares the debt with the value of the collateral. A borrower can cross the threshold if the collateral loses value or interest adds to the debt. The threshold and other terms belong to the selected market, rather than to one universal Ledger loan setting.

When a loan passes its market’s liquidation LTV, an outside liquidator may cover part or all of the balance and claim collateral along with an added reward. Morpho’s contracts hold the collateral and keep track of the loan and its interest. That means pledged tokens are subject to the market’s contract rules while the loan is open.

Yield.xyz connects Morpho’s markets to Ledger Wallet. Ledger supplies the technology interface and is not the lender. Borrowing rates change with how heavily the market is being used, so the cost can vary. Using wrapped Bitcoin also involves a custodian and a conversion step.

Ledger’s hardware signer shows users transaction details for deposits, borrowing, repayments and withdrawals before they approve them. That review and approval applies to the transactions users initiate. It does not give the signer control over a market’s liquidation rules after collateral has been deposited.

Borrowers can manage their positions in the wallet, including adding collateral and making repayments. Those actions can change a loan position, but each market’s threshold still determines when collateral becomes eligible for liquidation.