Liquidation (Lending)
The automated sale of a borrower’s collateral when its value falls below a protocol’s required threshold.
What is Liquidation (Lending)?
Liquidation in DeFi lending occurs when a borrower’s collateral value drops below the protocol’s LTV threshold (e.g., 80–90%), triggering smart contracts to sell the collateral to repay the loan. Liquidators, often bots, execute these sales, earning a bonus (typically 5–10% of collateral value). For example, if a $1,000 loan’s ETH collateral falls from $1,500 to $1,100, liquidation ensures lender repayment. Chainlink oracles provide real-time price data to trigger timely liquidations.
In 2024, DeFi protocols processed over $600 million in liquidations during market volatility, per Dune Analytics, highlighting the importance of robust oracle systems. Liquidations protect lenders and maintain protocol stability but can lead to borrower losses in bear markets. Advanced protocols like Aave use Dutch auctions to ensure fair pricing during liquidations.
Related Terms
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Financial markets for short-term borrowing and lending, typically under one year, involving instruments like repos, commercial paper, and CDs.
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The total value of digital assets in a DEX liquidity pool, determining its ability to handle trades with minimal price impact.
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A consensus mechanism used by Ethereum to secure its network and validate transactions.