GlossaryIntermediate

Liquidation

The forced sale of collateral when a loan's safety threshold is breached.

Liquidation is the automatic, forced sale of a borrower's collateral, typically triggered when the value of that collateral falls too close to, or below, the value of the outstanding loan.

Liquidation is designed to protect a lending protocol from bad debt, but it usually results in a loss for the borrower, sometimes including an additional liquidation penalty.

Examples

A sudden price drop in collateral can trigger liquidation faster than a borrower expects.
Monitoring a loan's health ratio helps a borrower avoid unexpected liquidation.