# Hoenn Vaults

## What are Vaults?

A Vault is a mechanism for depositing collateral to mint uTokens, enabling you to maintain your position. Similar in concept to CDPs (Collateralized Debt Positions) in MakerDAO, Vaults offer a streamlined way to manage collateralized assets.

Each Vault manages two balances: the collateral and uTokens. You can adjust these by depositing collateral or repaying uTokens, which affects your Vault’s [LTV Ratio](#loan-to-value-ltv-ratio).

You can close your Vault at any time by repaying all minted uTokens, allowing you to release your collateral.

## Overcollateralization

The minting of uTokens always requires excess backing to protect uToken holders from bad performance and slashing risks associated with each Vault. It ensures that if the validators of a Vault get slashed or accrue penalties, the loss of the (re)staked asset in that Vault does not cause uTokens to become unbacked. Instead, any such losses are absorbed by the excess backing provided by the restakers in the affected Vault.

Note that users who acquire uETH via an exchange cannot redeem the token for the underlying ETH until the redemption feature is implemented. Moreover, the excess backing of the token is reserved for the original restakers who minted uETH.

## Loan-to-Value (LTV) Ratio <a href="#loan-to-value-ltv-ratio" id="loan-to-value-ltv-ratio"></a>

The Loan-to-Value (LTV) Ratio represents the proportion of uTokens that can be minted relative to the underlying collateral and is set by governance for each collateral type.

$$
LTV Ratio = (uToken Amount / Collateral Amount) \* 100
$$

The Collateral Amount is determined by looking at the underlying amount of the LRT's restaked asset (e.g., ETH).

The [Max LTV](https://hoenn.gitbook.io/hoenn/liquidations#max-ltv) sets the upper limit of this ratio, defining the maximum uToken that can be minted relative to the underlying collateral amount as determined by the protocol.

*Example*: The Max LTV for weETH is set at 80.00%. This means that with 100 ETH as collateral (restaked ETH), 80 uETH can be minted. However, if the collateral tied to a validator is slashed and the LTV exceeds the [Liquidation Threshold](https://hoenn.gitbook.io/hoenn/liquidations#liquidation-threshold) of 82.00%, the Vault may face [liquidation](https://hoenn.gitbook.io/hoenn/protocol-mechanism/liquidations).

A higher LTV Ratio indicates a riskier position, as a large amount of uTokens are minted by relatively little collateral.
