Understanding Liquidation Risk in DeFi

Liquidation is how DeFi protocols protect themselves when a borrower's collateral no longer adequately covers their debt. Understanding when and why liquidations happen helps you protect your positions.

What Triggers a Liquidation

Liquidation occurs when the value of your collateral falls below a certain threshold relative to your debt. Different protocols measure this differently:

• Lending protocols (AAVE, Morpho, Euler): Health factor drops to 1.0 or below
• Perpetual exchanges (Hyperliquid): Margin ratio falls below maintenance requirement

When a liquidation is triggered, part or all of your collateral is sold to repay your debt. You lose the liquidated collateral plus a liquidation penalty.

Liquidation Risk on Lending Protocols

On AAVE, Morpho, and Euler, you deposit collateral and borrow assets against it. Your position becomes at risk when:

• Your collateral asset drops in price
• Your borrowed asset increases in price
• Interest accrues and increases your debt
• A stablecoin you use as collateral depegs

The health factor metric tracks how close you are to liquidation. Monitoring it continuously is impractical, which is why alerts matter.

Liquidation Risk on Perpetual Exchanges

On Hyperliquid, you trade with leverage. Your position has a liquidation price based on your entry, leverage, and margin. If the market moves against you far enough, your position gets liquidated.

Higher leverage means a smaller price movement can trigger liquidation. A 10x long position on ETH can be liquidated by a 10% price drop (minus fees and funding).

Why Timely Alerts Matter

Liquidation can happen quickly during volatile markets. The difference between a 5% loss from adding collateral and a 15%+ loss from liquidation depends on knowing early enough to act.

Checking dashboards manually is unreliable. You might be asleep, at work, or simply forget. By the time you check, it might be too late.

Otomato Liquidation Alerts

Otomato detects your positions on lending protocols and perpetual exchanges. When your position approaches liquidation, you receive an alert with:

• Which position is at risk
• Current health factor or margin level
• How close you are to liquidation

The alert arrives while you still have time to add collateral, repay debt, or close the position. No dashboard required.