DeFi & Yield

What is a liquidation in DeFi lending?

A liquidation in DeFi lending is the automatic sale of a borrower's collateral when its value falls below a required threshold, repaying the loan before it becomes undercollateralised. Borrowers post collateral worth more than they borrow, and if prices drop, the protocol sells part of it, often at a discount to liquidators who execute the sale. For example, borrow against ETH and a sharp ETH decline can trigger liquidation, leaving you with less collateral and a penalty. Volatile markets can cascade liquidations quickly, so borrowers monitor their collateral ratios closely.

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