Liquidation Mechanics: Collateral Risk in DeFi Lending

Frequently Asked Questions

01.What triggers a liquidation in a DeFi lending protocol?

A liquidation is triggered when a borrower's health factor falls below 1.0, meaning the value of collateral relative to outstanding debt has dropped below the protocol's minimum collateral ratio. Market price drops, collateral volatility, or insufficient top-ups all cause health factor decay.

02.What is a liquidation bonus and how does it affect capital allocators?

A liquidation bonus is a discount (typically 5-15%) on seized collateral offered to liquidators to repay underwater debt. For capital allocators, it signals protocol-level willingness to absorb short-term solvency cost to preserve overall system health.

03.How do DeFi liquidation mechanics differ from traditional margin calls?

Traditional margin calls give borrowers time to post additional collateral or close positions manually. DeFi liquidations are permissionless and near-instant: any wallet can repay the debt and claim collateral at a discount once health factor breaches 1.0, without borrower consent or notice period.