Liquidation Threshold

A liquidation threshold is the specific loan-to-value ratio at which a DeFi borrowing position becomes eligible for liquidation — if the value of a borrower's debt relative to their collateral rises past this threshold (for example, because the collateral's price falls or interest accrues on the debt), the position can be liquidated to protect the protocol's lenders. The liquidation threshold is typically set somewhat higher than the maximum loan-to-value ratio a borrower is allowed to open a new position at, leaving a buffer between initial borrowing and the point of actual liquidation risk.

The liquidation threshold is closely related to, and often used to calculate, a position's health factor (see Kaavon's "Health Factor" glossary definition) — a single number summarizing how close a position is to its liquidation threshold. A wider gap between a protocol's maximum initial loan-to-value ratio and its liquidation threshold gives borrowers more price-movement buffer before facing liquidation risk, though it typically comes paired with a correspondingly lower maximum initial borrowing capacity to maintain the lending pool's overall safety.