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

# Liquidations

> Learn what triggers a liquidation, how the liquidation penalty works, and the steps you can take to protect your position before it happens.

A liquidation occurs when the value of your collateral falls far enough that your [Morpho loan](https://dynamo.finance/) 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.

## 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.

```text theme={null}
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

## 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).

| Asset             | Typical liquidation penalty |
| ----------------- | --------------------------- |
| Stablecoins       | 5%                          |
| ETH, BTC          | 8–10%                       |
| Volatile altcoins | 10–15%                      |

<Warning>
  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.
</Warning>

## 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 [lending and borrowing](https://dynamo.finance/) positions
* If any collateral remains after the debt is fully cleared, it is returned to you

## How to avoid liquidation

<Steps>
  <Step title="Monitor your health factor">
    Check your health factor regularly in the **Dashboard**. Aim to keep it above 1.5 at all times.
  </Step>

  <Step title="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.
  </Step>

  <Step title="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.
  </Step>

  <Step title="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.
  </Step>

  <Step title="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.
  </Step>
</Steps>

<Tip>
  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.
</Tip>

<Note>
  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.
</Note>