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A liquidation occurs when the value of your collateral falls far enough that your loan is no longer adequately secured. To restore the protocol’s solvency, a third party — a liquidator — steps in to repay part of your debt and receives a portion of your collateral in return, at a discount. Liquidations are enforced automatically by smart contracts.

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When a liquidation is triggered

Smart contracts calculate your health factor continuously. When your health factor drops to 1.0 or below, your position is eligible for liquidation. 
Health factor = (Collateral value × Liquidation threshold) / Total debt
A health factor below 1.0 means your debt exceeds what your collateral can safely back at the liquidation threshold. The most common causes:
  • Your collateral asset’s price drops sharply
  • The asset you borrowed appreciates in value (increasing the real cost of your debt)
  • Both happen simultaneously

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The liquidation penalty

When a liquidator repays part of your debt, they receive your collateral at a discount relative to its market value. This discount is called the liquidation penalty (or liquidation bonus from the liquidator’s perspective).
AssetTypical liquidation penalty
Stablecoins5%
ETH, BTC8–10%
Volatile altcoins10–15%
Liquidations are irreversible. Once a liquidator has seized your collateral, there is no mechanism to undo the transaction. Proactively managing your health factor is the only way to avoid this outcome.

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What happens to your position after liquidation

A liquidation repays only enough debt to bring your health factor back above 1.0, it does not necessarily close your entire position. After the liquidation:
  • A portion of your debt is repaid
  • A corresponding portion of your collateral (plus the penalty) is transferred to the liquidator
  • Your remaining collateral stays in your position
  • If any collateral remains after the debt is fully cleared, it is returned to you

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How to avoid liquidation

1

Monitor your health factor

Check your health factor regularly in the Dashboard. Aim to keep it above 1.5 at all times.
2

Set price alerts

Configure alerts for your collateral assets in your wallet or a portfolio tracker. A 20% price drop in a high-LTV position can move your health factor into the danger zone quickly.
3

Add collateral when health factor drops

If your health factor falls toward 1.2 or below, deposit more collateral to raise it. This is the fastest way to restore safety without closing your position.
4

Repay debt to improve your ratio

Repaying part of your loan directly reduces your debt and improves your health factor. Even a partial repayment can move you out of the risk zone.
5

Avoid borrowing near the LLTV

Borrowing at the LLTV leaves no buffer for price volatility. Borrow at 50–70% of your maximum to maintain a comfortable margin.
Set a price alert for your collateral asset at 10–15% below its current price. That gives you time to add collateral or repay debt before liquidation becomes a real risk.
If you believe you are approaching liquidation and cannot act immediately, repaying even a small amount of debt can meaningfully improve your health factor and buy you time.