Liquidation
In one sentence
A liquidation happens when a borrowed position becomes undercollateralized and a third party repays part of the debt in exchange for a discount on the collateral, leaving the borrower with a loss.
What it actually means
When you borrow on a lending protocol, the protocol requires you to keep your collateral worth more than the debt by a safety margin. If your collateral value drops or your debt value rises enough that you cross the liquidation threshold, the protocol allows liquidators (bots or anyone) to repay part of your debt and seize an equivalent amount of collateral plus a bonus.
The borrower keeps the borrowed assets but loses the collateral that was sold, plus the liquidation penalty. It is the protocol's mechanism to stay solvent without trusting the borrower.
How it works
On Aave V3, when your health factor drops below 1.0, a liquidator can call liquidationCall. They repay up to 50% of your debt (the close factor) and receive the equivalent collateral plus a liquidation bonus (typically 5% to 10% depending on the asset). On Morpho, liquidation is per-market with customizable parameters. On Euler, the bonus is dynamic and grows as the position deteriorates.
Why it matters to you
A liquidation is one of the worst outcomes in on-chain lending. Beyond the bonus paid to the liquidator, you typically face slippage on the seized collateral and your position is closed at the worst possible price. If you held the position because you believed in the underlying asset, you also lose the upside once it recovers.
- You lose the liquidation bonus directly (5%–15% depending on protocol and asset).
- Your collateral is sold at the bottom of the move, not when you choose.
- You may be partially liquidated multiple times if the price keeps dropping.
- Gas fees and MEV competition can make the effective loss larger.
Real example
A borrower has 5 ETH ($15,000) as collateral on Aave and a $7,000 USDC debt. ETH drops 35% to $1,950, bringing collateral to $9,750. With an 80% liquidation threshold, weighted collateral is $7,800, debt is $7,000, HF = 1.11. Another 5% drop and the position becomes liquidatable. A liquidator repays $3,500 of the debt and seizes about $3,762 of ETH ($3,500 × 1.075). The borrower loses $262 to the bonus on this partial liquidation alone.
Partial vs full liquidation
Most protocols use a close factor that caps how much of the debt can be repaid in a single liquidation call. Aave V3 typically allows up to 50% (and 100% if the position is very deep underwater). This means a slowly deteriorating position can be partially liquidated multiple times in succession during a single drawdown, each time charging the liquidation bonus on the repaid slice. Euler's dynamic bonus reduces the worst-case loss but can still produce a 10%+ haircut on extreme positions.
Why liquidations cluster
Liquidations are not evenly distributed in time. They cluster around volatility spikes: a single ETH drawdown can trigger a wave of liquidations across Aave, Morpho, and Spark within minutes. This is why "the system worked but my position was liquidated" is a common after-the-fact reaction: by the time you noticed, the bots had already executed. Monitoring matters precisely because reaction time is short.
How Otomato monitors it
Otomato monitors your health factor continuously and alerts you before a liquidation can occur. Default thresholds trigger early warnings well above 1.0 so you have time to repay debt, add collateral, or close the position on your own terms. Alerts include the position context: which collateral, which debt, and how much price movement separates you from liquidation.
Related terms
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