Overview
Liquidation occurs when your loan’s health factor drops below 1, meaning your collateral value is insufficient to safely back your loan.How Liquidation Works
1
Health Factor Drops Below 1
Collateral value fell or loan balance increased (at maturity)
2
Position Becomes Liquidatable
Anyone can liquidate your position
3
Liquidator Action
Liquidator repays portion of your debt
4
Collateral Seized
Liquidator receives collateral + penalty
5
Position Adjusted
Your loan reduced, some collateral gone
Liquidation Math
Liquidation Penalty
When liquidated, you lose:- Portion of collateral to cover debt
- Additional penalty (varies by asset)
Example:
Avoiding Liquidation
1. Monitor Health Factor
Safe Zone
Health Factor > 1.5
Warning Zone
Health Factor 1.2 - 1.5
Danger Zone
Health Factor 1.0 - 1.2
Liquidatable
Health Factor < 1.0
2. Set Up Alerts
Enable notifications for:- Health factor below 1.5
- Health factor below 1.3
- Health factor below 1.1
- Collateral price drops 10%+
3. Add Collateral Proactively
Don’t wait until danger zone. Add collateral when:- Health factor drops to 1.5
- Major market volatility expected
- Approaching maturity with interest to settle
4. Partial Repayment
Reduce loan balance to improve health factor:5. Use Conservative LTV
Don’t borrow the maximum. Leave buffer:Fixed Rates Help (But Don’t Eliminate Risk)
What Fixed Rates Prevent
Rate Spike Liquidations
Variable rates can’t suddenly increase your debt
80% of Traditional Liquidations
Most DeFi liquidations come from rate spikes
What Fixed Rates Don’t Prevent
Collateral Price Drops
If ETH falls 40%, you can still be liquidated
Maturity Interest Settlement
Interest added at refinance increases debt
Liquidation at Maturity
Special risk: When loan matures, interest settles:Recovery After Partial Liquidation
If partially liquidated:- Assess Damage: Check remaining collateral and debt
- Stabilize: Add collateral or repay to improve HF
- Review Strategy: Consider reducing leverage going forward
Self-Liquidation
In some cases, self-liquidating may be better than waiting:- You control the timing
- Can minimize losses vs. waiting for worse prices
- Close position on your terms
FAQs
Can I prevent all liquidations?
Can I prevent all liquidations?
No. Collateral can always drop in value. You can only minimize risk through conservative LTV and active monitoring.
Who liquidates my position?
Who liquidates my position?
Anyone can liquidate. Professional liquidator bots typically execute liquidations quickly for profit.
Do I lose everything in liquidation?
Do I lose everything in liquidation?
No. Only enough collateral to cover the debt + penalty. Remaining collateral is yours.
Is there a grace period?
Is there a grace period?
No grace period for price-based liquidations. Once HF < 1, you’re liquidatable immediately.
Monitor Your Positions
Check health factors and set up alerts