Liquidation
Forced sale of collateral when a borrower's health factor falls below the protocol's threshold.
Liquidation cascades during stress can self-reinforce: dropping prices trigger sales that drop prices further. Most lending protocols offer liquidator bounties of 5-15%; Curve's crvUSD uses a soft-liquidation algorithm (LLAMMA) that smooths the curve.
Related terms
- Health factorAn Aave/Spark-style metric: collateral × liquidation-threshold / debt — liquidation triggers when it drops below 1.
- Collateral ratioCollateral value / debt value — the headline solvency metric for CDPs.
- crvUSDCurve Finance's CDP-issued stablecoin, collateralised by ETH, wstETH, sfrxETH, WBTC, and tBTC, using a soft-liquidation algorithm (LLAMMA).