Liquidation
The automatic sale of a borrower's collateral when their loan-to-value ratio exceeds the protocol's safety threshold.
Liquidation in DeFi occurs when a borrower's collateral value falls to the point where the protocol deems the loan unsafe. Automated liquidators (bots monitoring the blockchain) repay part of the outstanding debt and receive the equivalent collateral plus a liquidation bonus — typically 5–15%.
Liquidations are essential to maintaining the solvency of lending protocols. They are fully automated by smart contracts and happen within the same block as the price update that triggers them, making the process near-instant.
Large-scale liquidation cascades — where falling prices trigger liquidations, which create sell pressure, which triggers more liquidations — have been responsible for some of crypto's sharpest short-term price crashes.