Borrowing on a money market gives you liquidity without selling what you hold, but it comes with a job: keeping your position healthy. Liquidation is what protects the protocol when a position gets too risky, and knowing how it works is the difference between borrowing with confidence and getting caught out.
This guide covers what liquidation actually is, how the health factor works, what triggers a liquidation, and the habits that keep a borrowed position safe on the XOXNO lending markets.
What is liquidation?
When you borrow, your collateral secures the loan. If the value of your debt climbs too close to the value of your collateral, the protocol lets a third party (a liquidator) repay part of your debt in exchange for some of your collateral, at a discount. That event is a liquidation.
It exists to keep every market solvent, making sure loans stay backed by enough collateral even when prices move. The cost of that protection falls on the borrower who let their position drift too far.
The health factor
XOXNO expresses how safe a position is as a single number, the health factor. It weighs the value of your collateral (adjusted by each asset's liquidation threshold) against the value of your debt:
- Well above the threshold: your position is safe with room to spare.
- Approaching the threshold: risk rises sharply, and a small price move could tip you over.
- Below the threshold: the position becomes eligible for liquidation.
Two limits matter here. Your loan-to-value (LTV) sets how much you can borrow at the start. The liquidation threshold, always higher than the LTV, is the point at which liquidation can begin. The gap between the two is your safety buffer.
What triggers a liquidation
A position crosses the line for one of two reasons:
- Your debt grew. Borrow interest accrues continuously, so a position left untouched slowly increases what you owe.
- Your collateral fell in price. A drop in the market value of your collateral reduces how much debt it can safely back.
Often it is both at once: interest quietly raises the debt while a price dip lowers the collateral, and the health factor slips below the threshold.
What happens during a liquidation
A liquidation does not wipe out your whole position. Instead:
- A liquidator repays a portion of your outstanding debt.
- They receive an equivalent value of your collateral, plus a liquidation bonus as their incentive.
- Your remaining collateral and debt stay in your position, now at a safer health factor.
You keep what is left, but you have paid the bonus and given up collateral at a discount. That is exactly why avoiding liquidation matters.
How to keep your position safe
- Borrow conservatively. Drawing well below your limit gives price moves room to breathe.
- Prefer stable or correlated collateral. Borrowing a stablecoin against a stablecoin carries far less price risk than a volatile pair. XOXNO's e-mode raises borrowing power for correlated assets.
- Top up or repay early. Add collateral or repay debt before your health factor gets tight, not after.
- Watch interest accrual. Your debt grows over time even if prices stay flat.
- Monitor actively. Keep an eye on your health factor, especially in volatile markets.
Monitoring your position
You can track every open position and the wider market on the participants dashboard, and review recent liquidations to see how the mechanism plays out. For the exact parameters — thresholds, bonuses, and the health factor math — see the Stellar lending docs.
A note on multiply and leverage
Leveraged strategies amplify both sides of a trade. Positions built with multiply or leverage react faster to price moves, so their health factor can deteriorate more quickly. Treat them with extra caution and a larger safety buffer.
If borrowing is new to you, start with what DeFi lending is. And if you want yield with no liquidation risk at all, supplying USDC never risks liquidation on its own.
