Definition
The automatic sale of a borrower's collateral by a DeFi protocol when its value drops below the required minimum. Liquidation protects the protocol from bad debt but results in loss for the borrower.
Why It Matters
Liquidation is one of the biggest risks in DeFi lending. Understanding it prevents devastating losses from using leveraged borrowing positions.
Example
You borrow $1,000 USDC using $2,000 of ETH as collateral. ETH drops 40% to $1,200. The protocol automatically liquidates your ETH to repay the loan — you lose your collateral.
Related Terms
Collateral
DeFi
Stablecoin
Smart Contract