✝️Liquidations

Understanding Liquidations

Liquidation in cryptocurrency lending happens when a borrower's collateral is insufficient to cover their loan, either because the collateral value has decreased or the loan value has increased. This triggers when the borrower's health factor falls below 1, leading to a portion of their debt being considered paid off, along with a liquidation fee taken from the leftover collateral.

Impact of Liquidation Penalties

Liquidation penalties differ depending on the collateral type. For example, using Bitcoin (BTC) as collateral may result in the liquidator receiving a bonus over the covered loan amount, such as an extra 5%.

Illustrative Example

Imagine Ben, who deposits 10 Bitcoin (BTC) and borrows an equivalent of 5 BTC in USD Coin (USDC). Should Ben’s health factor drop below 1, his loan might be liquidated. In this case, a liquidator could repay up to half of Ben’s borrowed amount, about 2.5 BTC in USDC, and receive a bonus, like 5% more than the covered amount.

Preventing Liquidation

To prevent liquidation, borrowers should try to boost their health factor by adding more collateral or repaying part of their loan. Repaying debt generally proves more effective than simply increasing collateral. Maintaining a health factor above 2 is recommended to reduce risks.

Opportunities for Participation

Anyone can participate in liquidations, though the competition is often intense. Many use advanced tools and bots to quickly participate in liquidations and take advantage of the potential rewards.