> For the complete documentation index, see [llms.txt](https://docs.mutuum.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.mutuum.com/protocol-stability/market-volatility-and-liquidity.md).
# Market Volatility & Liquidity
Managing on-chain liquidity and trading volume is crucial for the liquidation process within Mutuum. Adequate liquidity ensures distressed positions can be closed out promptly without incurring undue price slippage. In turn, caps and liquidation parameters help control exposure; for instance, when asset liquidity is limited, the protocol may offer higher incentives to liquidators to maintain effective coverage.
Price fluctuations also affect the collateral that underpins open borrow positions. If market volatility causes the collateral’s value to dip below what is owed, the protocol’s solvency is threatened. Ensuring an appropriate Loan-to-Value (LTV) ratio helps mitigate this risk by providing a necessary cushion. Moreover, the liquidation threshold must be set at a level that preserves sufficient headroom for liquidators to profit while stabilizing at-risk loans.
* Lower-volatility assets, such as stablecoins and ETH, can sustain higher LTVs (e.g., up to 75%) and typically feature an 80% liquidation threshold.
* More volatile tokens are constrained to lower LTVs in the 35–40% range, with liquidation thresholds closer to 65%. These parameters minimize the chance that a sudden price drop leads to undercollateralization and subsequent liquidation events.
Finally, each asset’s overall risk rating informs the reserve factor applied. Less volatile assets might incur a share around 10%, while riskier ones can reach 35%. This structure strikes a balance between securing the protocol’s health and fostering broader participation for diverse token offerings.
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