What Triggers Liquidation in a Lending Protocol?
Liquidation in a crypto lending protocol happens when your health factor falls below one, often after collateral prices drop or debt grows steadily.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
On this page
- Health factor compares collateral value with debt and threshold.
- Oracle price updates can move the health factor.
- Interest raises debt over time.
- Governance votes can change collateral factors.
A liquidation in a lending protocol starts when your health factor falls below one. The health factor compares the value of your collateral, adjusted by the protocol's threshold, with the debt you owe. When it drops below one, the protocol's smart contracts can let liquidators repay part of the loan and take collateral.
What Sets Off a Liquidation?
A liquidation triggers when your collateral's value falls below the protocol's required threshold for your debt. Each protocol sets a collateral factor or loan-to-value limit, and if collateral value drops enough, the debt becomes too large relative to the backing. The protocol then lets liquidators repay part of the debt and take a matching amount of collateral.
How Health Factors and Oracles Interact
The health factor turns collateral, debt, and the protocol's threshold into one number. Above one, the position is above the liquidation line; below one, liquidators can act. Loan-to-value compares debt with collateral value, and a higher loan-to-value means less room before liquidation. Oracles feed the prices the protocol uses, so a sharp or delayed update for collateral or borrowed assets can push the health factor below one.
Interest, Governance, and Your Own Actions
Even if prices stand still, your debt can grow. Interest accrues on the borrowed amount, so the debt side of the health factor rises over time. Protocol governance can also move the line, and your own transactions can lower the health factor in an instant.
- Interest grows the debt. As borrowers owe more, the health factor falls even when collateral prices do not move.
- Governance votes can change the rules. Token holders may adjust collateral factors or liquidation thresholds, and new settings can apply soon after a vote. MakerDAO, which rebranded as Sky in September 2024, is one example.
- Withdrawing collateral or borrowing more lowers the health factor. Both actions change the balance between collateral and debt right away.
Frequently asked questions
Adding collateral can raise the health factor above one, which may stop a liquidation if the transaction is confirmed before the trigger.
A liquidation penalty is an extra cost charged when a liquidator repays part of your debt, and it reduces the collateral left.
No, thresholds vary by protocol and by asset because each market has its own risk settings.
A health factor exactly at one sits at the edge of safety, and a small drop below it can let liquidators act.
