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Liquidation process diagram showing automated risk management
Liquidation is an automated process that protects lenders and the protocol when a borrowing position becomes unsafe.

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When Liquidation Happens

Your position becomes eligible for liquidation when your Health Factor (HF) < 1.0. This can occur when:
  • Collateral value decreases
  • Borrowed amount grows through accrued interest
  • Or both combined

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The Liquidation Process

1

Liquidation Triggered

Any participant can liquidate your position once HF < 1.0
2

Debt Repayment

Liquidator repays up to 50% of your outstanding debt (close factor = 0.5, asset-specific)
3

Collateral Seized

Liquidator claims equivalent collateral value plus a liquidation bonus (5–15%, asset-specific)
4

Position Restored

Your remaining position is brought back above the liquidation threshold

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Examples

Alice supplies 100 tokenised AAPL shares and borrows $5,000 USDC. If HF < 1.0:
  • Liquidator repays $2,500 USDC of Alice’s debt
  • Receives USD 2,500 worth of AAPL + 5% bonus (additional $125 in AAPL)
  • Alice retains USD 7,375 worth of AAPL and USD2,500 debt

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Mechanics

  • Close Factor: Max share of a borrower’s debt that can be liquidated in one tx (typically 50%).
  • Liquidation Bonus: Incentive given to liquidators, set per-asset (5–15%).
  • Partial vs Full: Liquidations are partial until HF > 1.0. Only if collateral collapses entirely might a position be fully liquidated.

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Who Can Liquidate?

MEV Bots

Automated actors monitoring HF in real time; they liquidate instantly when profitable.

Individual Users

Anyone can manually liquidate using protocol interfaces.

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Best Practices

  • Check health factor daily, especially during volatile markets
  • Set up alerts for health factor thresholds
  • Monitor both collateral and debt asset price movements
  • Start with higher health factors (>1.5) until comfortable
  • Consider correlation between your collateral and debt assets
  • Keep reserve funds available for emergency collateral additions
  • Increase health factor during uncertain market periods
  • Be aware that stablecoin prices can fluctuate from $1.00
  • Factor in gas costs for emergency position management
Maintaining a health factor above 1.0 is essential to avoid liquidation. Aim for higher levels based on your risk tolerance and market conditions.