How DeFi liquidation works: threshold, repayment and collateral

Find the condition that makes a position eligible

A lending position records collateral and debt. The program values them using its configured prices and factors, then applies a liquidation condition. Current state can become eligible after prices or debt change.

A maximum-borrow condition controls opening or adding debt. The liquidation boundary serves another stage. A position may be unable to borrow more before it becomes eligible for liquidation.

Read the exact market and mode. Kamino's documentation describes risk-adjusted debt and distinct LTV concepts; other products define their own calculations. A single unadjusted ratio can explain the idea without reproducing every live market rule.

Once an action is permitted, a liquidator can invoke it under the program's authorisation model. A borrower should not interpret a warning banner as a guaranteed period during which no operation can happen.

Separate threshold, close factor and compensation

The threshold answers when liquidation becomes eligible. A close factor or other repayment limit answers how much debt can be repaid in one operation. A bonus compensates the liquidator through collateral under the defined formula.

Other charges, caps, position modes and exceptional paths can also apply. A rule limiting a normal event to part of the debt may change in a more severe state. The current Kamino guide, for example, describes partial and insolvency-risk paths.

Dynamic bonuses can change with the condition of the position. Do not assume that the largest advertised bonus applies to every eligible event.

Keep the actual field names and source observation with the calculation. A saved parameter screenshot from the time the loan opened may not describe the configuration at a later event.

Work through one chosen-parameter liquidation

Choose an already deteriorated teaching position with collateral worth 1,000 units and debt worth 820. Use liquidation eligibility above 80% LTV, a 20% repayment limit and a fixed 5% bonus for this example. Hold valuations fixed and exclude other charges.

The initial ratio is 82%, so it is above the chosen threshold. Repaying 20% of the 820 debt means a repayment worth 164. At a 5% bonus, the liquidator receives collateral worth 172.2.

The remaining debt is 656, and collateral value is 827.8. Their ratio is about 79.25%, below the chosen 80% boundary. Under this simplified model, that one operation restored the position below eligibility.

The 8.2-unit difference between collateral received and debt repaid is the chosen bonus before the liquidator's own costs. The borrower lost that collateral value as part of resolving the debt. These values are a lesson, not current parameters or an observed Kamino liquidation.

Recalculate health after the operation

Permission to liquidate is different from completed execution

A liquidator still needs to construct and execute a valid transaction. It must obtain the debt asset, use correct accounts and satisfy the program's price and resource conditions.

The position can change before execution. Another repayment, another liquidation or a new valid price can alter what the program permits. A preview based on old state is not the final result.

To investigate a completed event, read the actual signature, instructions and resulting balances. Identify which debt was repaid, which collateral moved and the applied charges. Then recalculate remaining health under the program's defined inputs.

A failed liquidation transaction is an execution outcome of its own. Logs can show attempted work without establishing that the debt and collateral changes survived.

Understand what happens when recovery is impaired

Collateral can move in price faster than transactions can recover debt. A large sale can also face limited depth or unavailable infrastructure. Opening with excess collateral does not ensure every later state has the same coverage.

Read the market's bad-debt, backstop or exceptional deleveraging arrangements. A protection fund has an actual amount, eligibility and control mechanism; its name alone does not establish complete coverage.

Losses can affect suppliers or other participants according to the protocol. Locate the rule that allocates the shortfall rather than inferring the result from the word overcollateralised.

Keep these mechanisms beside the normal liquidation path so readers understand both the intended recovery and the state it may fail to resolve.

Read and manage the position through its actual inputs

Retain the market, mode, asset identities, price sources, thresholds and repayment rules. Observe debt and collateral quantities as well as the health number.

Repaying debt or adding eligible collateral can change health if the operation executes under current conditions. Repaying with collateral can involve a swap and its own price bounds. Verify the resulting state afterward.

For a post-event report, combine before/after state with execution evidence and effective parameters. The LTV guide explains ratios and the oracle guide identifies the consumed prices.

Common questions