Liquidation
When a loan gets automatically closed because your collateral lost too much value. Your collateral is sold to pay back the loan.
Example
Your ETH collateral being sold at a discount when its price drops too much, to make sure lenders get their money back.
Related Terms
Advanced Concepts
⚙️How It Works
- 1
Health Factor Drops
Your collateral value falls or debt increases
- 2
Threshold Breached
Collateral ratio falls below the liquidation threshold
- 3
Liquidator Steps In
Bots compete to repay your debt and claim your collateral
- 4
Penalty Applied
You lose your collateral plus a liquidation penalty (5-15%)
📊Key Numbers
5-15%
Liquidation Penalty
extra cost beyond loan
<1.0
Health Factor
triggers liquidation
>1.5
Safe Health Factor
comfortable buffer
Seconds
Liquidation Speed
bots act instantly
⚠️Risks & Warnings
- •Liquidations happen fast - often before you can react
- •Network congestion during crashes can prevent you from adding collateral
- •Cascade liquidations can accelerate market crashes
- •Partial liquidations may leave you in a worse position
🚀Getting Started
- 1Always maintain a health factor above 1.5 for safety
- 2Set up alerts (DefiSaver, Instadapp) to monitor your positions
- 3Use stablecoins as collateral for lower volatility risk
- 4Keep extra funds ready to top up collateral if needed
- 5Consider automated protection tools that add collateral for you