Liquidation

Liquidation in DeFi is forced closure of an undercollateralized loan. The protocol sells collateral to repay debt so it does not eat bad debt. You deposit ETH worth $150 and borrow $100 DAI. ETH falls so collateral is $110 against $100 debt. The ratio breaches the minimum, often 110-150%.

A liquidator bot repays part of the debt and takes collateral at a discount, the liquidation bonus, often 5-15%. That discount is why bots watch positions.

That is how lending stays solvent when collateral crashes. For the borrower it is expensive. You lose collateral below market in a move that already hurt you. Cascade liquidations happen when mass sells drive prices down and trip more liquidations. Stay conservative on ratios, watch positions or use automation, and learn each protocol's parameters.

Liquidation in DeFi is the forced closure of an undercollateralized position, protecting protocols from bad debt by selling collateral to repay outstanding loans. ETH price drops, your collateral value falls to $110 while your debt remains $100. This discount incentivizes liquidators to actively monitor and close risky positions.

Without it, protocols would accumulate bad debt when collateral values collapse. Aave liquidates when health factor drops under 1. A third party repays part of the debt and takes collateral plus a bonus.