Liquidation
Also known as: Collateral Sale, Debt Repayment Trigger, Loan Liquidation
A process in lending protocols where collateral is sold when a borrower’s position becomes undercollateralized.
Liquidation occurs when a borrower's collateral value falls below a required threshold, triggering an automatic or manual sale of the collateral to repay the loan. It’s common in DeFi lending platforms like Aave, Compound, and Maker. This protects the protocol from bad debt and maintains solvency. Liquidators receive a reward or fee for executing liquidations. Parameters like loan-to-value (LTV), liquidation thresholds, and penalties vary by platform. Users can avoid liquidation by repaying loans or adding collateral before reaching the danger zone.