> ## Documentation Index
> Fetch the complete documentation index at: https://docs-staging.centuari.finance/llms.txt
> Use this file to discover all available pages before exploring further.

# Liquidation

> Understanding and avoiding liquidation risk

## Overview

Liquidation occurs when your loan's health factor drops below 1, meaning your collateral value is insufficient to safely back your loan.

<Warning>
  **Fixed rates don't eliminate liquidation risk from collateral price drops.** They eliminate rate-spike liquidations only.
</Warning>

## How Liquidation Works

<Steps>
  <Step title="Health Factor Drops Below 1">
    Collateral value fell or loan balance increased (at maturity)
  </Step>

  <Step title="Position Becomes Liquidatable">
    Anyone can liquidate your position
  </Step>

  <Step title="Liquidator Action">
    Liquidator repays portion of your debt
  </Step>

  <Step title="Collateral Seized">
    Liquidator receives collateral + penalty
  </Step>

  <Step title="Position Adjusted">
    Your loan reduced, some collateral gone
  </Step>
</Steps>

## Liquidation Math

```
Example Position:
  Collateral: 5 ETH @ $2,000 = $10,000
  Borrowed: $8,500 USDC
  Liquidation Threshold: 85%

  Health Factor = $10,000 / ($8,500 × 0.85) = 1.38 ✓ Safe

ETH drops to $1,600:
  Collateral Value: 5 × $1,600 = $8,000
  Health Factor = $8,000 / ($8,500 × 0.85) = 1.11 ⚠️ Getting risky

ETH drops to $1,400:
  Collateral Value: 5 × $1,400 = $7,000
  Health Factor = $7,000 / ($8,500 × 0.85) = 0.97 ❌ LIQUIDATABLE
```

## Liquidation Penalty

When liquidated, you lose:

* Portion of collateral to cover debt
* Additional penalty (varies by asset)

| Collateral  | Liquidation Penalty |
| ----------- | ------------------- |
| ETH         | 5%                  |
| wBTC        | 5%                  |
| Stablecoins | 3%                  |
| Stocks      | 8%                  |
| Gold        | 5%                  |

**Example**:

```
Liquidation Event:
  Debt repaid by liquidator: $4,000
  Collateral seized: $4,000 + 5% = $4,200 worth

  You lose: $4,200 in collateral
  You keep: Remaining collateral, reduced debt
```

## Avoiding Liquidation

### 1. Monitor Health Factor

<CardGroup cols={2}>
  <Card title="Safe Zone" icon="check" color="#16a34a">
    Health Factor > 1.5
  </Card>

  <Card title="Warning Zone" icon="exclamation" color="#eab308">
    Health Factor 1.2 - 1.5
  </Card>

  <Card title="Danger Zone" icon="triangle-exclamation" color="#dc2626">
    Health Factor 1.0 - 1.2
  </Card>

  <Card title="Liquidatable" icon="skull" color="#7f1d1d">
    Health Factor \< 1.0
  </Card>
</CardGroup>

### 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:

```
Before:
  Collateral: $10,000
  Borrowed: $8,000
  Health Factor: 1.47

Repay $2,000:
  Collateral: $10,000
  Borrowed: $6,000
  Health Factor: 1.96 ✓ Much safer
```

### 5. Use Conservative LTV

Don't borrow the maximum. Leave buffer:

| Strategy     | Utilization | Safety     |
| ------------ | ----------- | ---------- |
| Conservative | 50-60%      | Very Safe  |
| Moderate     | 60-70%      | Safe       |
| Aggressive   | 70-80%      | Risky      |
| Maximum      | 80-90%      | Very Risky |

## Fixed Rates Help (But Don't Eliminate Risk)

### What Fixed Rates Prevent

<CardGroup cols={2}>
  <Card title="Rate Spike Liquidations" icon="check" color="#16a34a">
    Variable rates can't suddenly increase your debt
  </Card>

  <Card title="80% of Traditional Liquidations" icon="check" color="#16a34a">
    Most DeFi liquidations come from rate spikes
  </Card>
</CardGroup>

### What Fixed Rates Don't Prevent

<CardGroup cols={2}>
  <Card title="Collateral Price Drops" icon="x" color="#dc2626">
    If ETH falls 40%, you can still be liquidated
  </Card>

  <Card title="Maturity Interest Settlement" icon="x" color="#dc2626">
    Interest added at refinance increases debt
  </Card>
</CardGroup>

## Liquidation at Maturity

Special risk: When loan matures, interest settles:

```
Before Maturity:
  Collateral: $10,000
  Principal: $8,000
  Accrued Interest: $500
  Health Factor: 1.47

At Maturity (interest settles):
  Collateral: $10,000
  Total Debt: $8,500
  Health Factor: 1.38 (lower!)
```

If health factor was already marginal, maturity settlement could trigger liquidation.

**Solution**: Add collateral before maturity or enable auto-refinance with collateral top-up.

## Recovery After Partial Liquidation

If partially liquidated:

1. **Assess Damage**: Check remaining collateral and debt
2. **Stabilize**: Add collateral or repay to improve HF
3. **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

<AccordionGroup>
  <Accordion title="Can I prevent all liquidations?">
    No. Collateral can always drop in value. You can only minimize risk through conservative LTV and active monitoring.
  </Accordion>

  <Accordion title="Who liquidates my position?">
    Anyone can liquidate. Professional liquidator bots typically execute liquidations quickly for profit.
  </Accordion>

  <Accordion title="Do I lose everything in liquidation?">
    No. Only enough collateral to cover the debt + penalty. Remaining collateral is yours.
  </Accordion>

  <Accordion title="Is there a grace period?">
    No grace period for price-based liquidations. Once HF \< 1, you're liquidatable immediately.
  </Accordion>
</AccordionGroup>

<Card title="Monitor Your Positions" icon="chart-line" href="https://app-staging.centuari.finance">
  Check health factors and set up alerts
</Card>