Liquidation occurs when a borrower’s collateral becomes insufficient to cover their loan, usually due to a drop in the collateral’s value. Unlike traditional finance, where credit scores determine borrowing limits, DeFi loans are

The Loan-to-Value (LTV) ratio typically determines when a liquidation is triggered and presents a percentage of a borrower’s loan relative to their collateral. For example, if someone deposits $1,000 worth of BTC and borrows $600 of USDC, their LTV is 60%.

Typically, when the LTV exceeds the liquidation threshold, a liquidation is triggered. This threshold is set below 100% because cryptocurrency prices can be volatile, and a sudden drop in collateral value could leave lenders with insufficient funds to cover outstanding loans. By enforcing liquidation before the LTV reaches 100%, protocols ensure that loans remain overcollateralized and mitigate the risk of bad debt.

If BTC’s value drops and the health factor falls below 1, the borrower’s collateral is liquidated to repay the loan.

To learn more about Lending & Borrowing, visit:

• Lending & Borrowing Overview
• How Lending & Borrowing Works
• Interest Rates
• Flash Loans
• Lending & Borrowing Key Terms
• Lending & Borrowing Key Considerations
• Lending & Borrowing Projects