What is liquidation threshold?

The collateralization ratio at which a lending protocol allows anyone to repay part of your debt and seize your collateral at a discount.

It sits above the point of insolvency, giving liquidators an incentive to act while the position still covers itself. Protocols set the threshold per collateral asset, and volatile or thinly traded collateral carries a stricter one.

Liquidations are automatic and permissionless: no one warns you, and a price wick that touches the threshold for one block is enough. That last point is what separates on-chain lending from a margin call at a broker.

How it works

A lending position has three published numbers, and confusing them is the usual mistake.

1. The maximum loan-to-value ratio caps how much you can borrow against a given collateral asset at the moment you borrow.
2. The liquidation threshold is higher, and it is the point at which your position becomes eligible for liquidation. The gap between the two is your buffer.
3. The liquidation bonus, sometimes called the penalty, is the discount a liquidator receives on the collateral they take. It is what pays them to act.

Health is usually expressed as a single factor, computed as the value of your collateral times its threshold, divided by the value of your debt. Above 1 the position is safe; at or below 1 anyone can liquidate it.

Because the process is permissionless, bots monitor every position continuously and act within a block of eligibility. There is no grace period, no phone call, and no possibility of adding collateral after the fact. Protocols set stricter thresholds for volatile or illiquid collateral precisely because a liquidator has to be able to sell what they seize.

Everything depends on the price the protocol reads, which comes from an oracle. A stale or manipulated feed can trigger liquidations that the real market would not justify, which is why oracle design is a first-order risk in lending protocols rather than a technical footnote.

Example

Illustrative arithmetic. You deposit $10,000 of an asset whose maximum loan-to-value is 70 percent and whose liquidation threshold is 80 percent, with a 5 percent liquidation bonus. You borrow $6,000 of a stablecoin, which is inside the 70 percent limit.

Your health factor is $10,000 times 0.80, divided by $6,000, which is 1.33. The collateral can fall to $7,500 before that reaches 1, a 25 percent decline. If it does, a liquidator repays part of your $6,000 debt and receives collateral worth 105 percent of what they repaid. You keep the borrowed stablecoins and lose the seized collateral plus the bonus.

Why it matters when you buy

Borrowing against crypto collateral converts a price decline into a forced sale at the worst possible moment, which a plain purchase does not. If you are comparing routes, note that a spot purchase has no threshold and no oracle dependency at all. The liquidity view shows how deep the market for an asset actually is, which is what determines whether a large liquidation clears cleanly or moves the price.

Related terms

• collateralization ratio: the measure the threshold applies to
• liquidation: the event itself
• over collateralization: why the buffer exists
• oracle: the price feed the protocol reads
• defi: the lending protocols this describes
• flash loan: a tool used in oracle manipulation attacks

Questions

How much buffer should I keep?

That depends on the asset's volatility and on your ability to act quickly, and there is no general answer. What is certain is that the buffer is measured against a wick, not a daily close.

Can I be liquidated without any warning?

Yes. The process is permissionless and automated, so eligibility and execution can happen in the same block. Some interfaces send alerts, and none of them is a guarantee.

Who profits from liquidating me?

Whoever runs the transaction. They repay part of your debt and receive collateral at a discount set by the protocol, which is the incentive that keeps the system solvent.