Risks & Security
Liquidation
Collateral Liquidation
Repayment and seizure of collateral after a loan breaches its threshold
Definition
Liquidation is the enforcement of a debt’s collateral rules when a position breaches its threshold. In Aave-style lending, a liquidator repays eligible debt and receives collateral plus a bonus; the position can be liquidated before collateral value falls below total debt.
Example
With $10,000 collateral, an 80% liquidation threshold and $8,100 debt, health factor is 8,000/8,100 = 0.988. If an eligible liquidator repays $1,000 with a hypothetical 5% bonus, $1,050 of collateral is taken.
How it works
An oracle update or accrued interest can push the health factor below 1. A liquidator submits a repayment and collateral claim; protocol-specific close factors limit how much debt can be repaid in one action.
Risks to Consider
- The bonus adds a penalty to the borrower’s market loss
- Fast price gaps can leave debt after collateral is exhausted
- Congestion or thin liquidity can prevent profitable liquidations
Common Questions
Is liquidation the same as a low health factor?
No. Health factor measures threshold-adjusted collateral coverage. Falling below 1 makes an Aave-style position eligible; liquidation is the actual repayment and seizure transaction.