Liquidations

Liquidation is a critical process that safeguards lenders when a borrower’s health factor dips below 100%. This typically occurs if the collateral’s value no longer covers the debt, often due to price fluctuations. The collateral-to-debt ratio is captured by the health factor, based on each collateral asset’s liquidation threshold (LT).

Liquidations rely on oracle price feeds and are carried out by liquidator bots, both internally and by third parties. During liquidation, a penalty is applied to the collateral’s value, creating an incentive for swift execution. A portion of the seized collateral compensates liquidators for their service.

If the collateral’s quoted value during liquidation cannot fully cover the debt, the shortfall—known as bad debt—is socialized among all pool lenders. Liquidation is permissionless and open source, enabling anyone to run a liquidator bot. For more information, refer to Running a Liquidator Bot.