Partial Liquidation
A liquidation design that closes only the portion of an under-collateralized position needed to restore it to a safe loan-to-value ratio, rather than closing the entire position at once.
Partial liquidation is a DeFi lending design that, when a position crosses its liquidation threshold (see Kaavon's "Liquidation Threshold" glossary definition), closes only the specific portion of the position needed to bring its loan-to-value ratio back to a safe level, rather than liquidating the entire position outright. This contrasts with a full liquidation, which closes the entire position at once regardless of how much would actually be needed to restore safety.
Partial liquidation benefits borrowers by reducing the liquidation penalty (see Kaavon's "Liquidation Penalty" glossary definition) and lost collateral exposure to only what's genuinely necessary, rather than forcing a borrower to lose their entire position over a comparatively small breach of the liquidation threshold. The tradeoff for the protocol is added complexity in the liquidation mechanism's design and execution, since calculating and executing a precisely sized partial liquidation is more involved than simply closing an entire position in one step.
Examples
- A protocol using partial liquidation might close only 20% of an under-collateralized position, just enough to restore a safe loan-to-value ratio, rather than liquidating the entire position.
- Partial liquidation reduces a borrower's loss compared to full liquidation, since only the amount genuinely necessary to restore safety is closed rather than the entire position.