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Liquidation lets someone repay debt on an account whose health factor is below 1 and receive collateral in return. It does not require the account owner’s permission.

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When liquidation is possible

An account becomes eligible when its threshold-weighted collateral value falls below its debt value. This can happen because collateral prices fall, debt-asset prices rise, or interest increases debt. Eligibility does not guarantee immediate liquidation. Required oracle prices, listing controls, collateral seizure controls, and settlement conditions must also allow the transaction. An oracle outage can delay liquidation while the account’s debt continues to accrue interest.

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Debt repayment and collateral seizure

A liquidator funds debt repayment and receives collateral from the account. The protocol allocates seizure proportionally across the account’s collateral set. The account keeps any collateral and debt left after settlement, unless the remaining balances qualify for bad-debt cleanup. The liquidation bonus is collateral value above the debt repaid. The spoke’s bonus curve generally quotes a larger bonus as health factor falls, but a cap intended to preserve health factor can reduce the actual bonus. Collateral shortfalls and rounding also affect the payout. If debt remains, interest continues on that balance. A liquidation can improve health factor without restoring the buffer the owner wants.

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How much debt can be repaid

The repayment limit usually aims to move health factor toward the spoke’s configured target. There is no fixed percentage of debt that every liquidation can close. Several rules can change the quoted repayment limit:
  • If collateral still covers the debt but the health-factor-preserving bonus cap is below the base bonus, the quote expands to the full debt balance with the bonus capped at zero or above.
  • If the calculated repayment would leave less than $5 of debt, the permitted repayment expands to the full debt balance.
  • If collateral value is below debt value, the quote is limited to the repayment backed by collateral at the base bonus.
  • For collateral with fewer than three decimals, token base-unit rounding can increase the repayment quote or reduce the collateral paid out.
A full-debt quote is an upper limit, not a requirement to offer that entire amount. A liquidator can offer less. Unused payments are excluded or refunded under the settlement rules. The liquidation reference explains the calculation and settlement options.

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Liquidation fee

The protocol fee is calculated from the collateral bonus remaining after any seizure cap. It is taken from the seized collateral, not added as another seizure against the borrower. For token payouts, a positive fee below one token base unit is raised to one unit. The fee is then capped by the whole base units paid above the repayment share. If there is no such excess, the fee is zero. Listings with fewer than three decimals must set a zero liquidation fee. A quoted bonus does not guarantee a profitable liquidation. Collateral shortfalls, rounding, and transaction costs still affect the result.

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How collateral is received

A liquidator can receive tokens from available pool cash or receive supply shares credited to another authorized account on the same spoke. The receiving account must use Normal mode; the liquidator can also create a new account. Share credit requires no free collateral cash and bypasses ordinary supply caps and collateral-entry permissions. Receiver position limits and low-decimal collateral isolation still apply. Credited shares remain subject to withdrawal conditions and market losses.

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Bad debt and suppliers

Debt that cannot be recovered from collateral can be written off when debt exceeds collateral value and the remaining collateral is worth at most $5. Cleanup removes the account’s remaining positions and burns its position NFT. A write-off reduces the affected hub-asset market’s supply index, which reduces the token value of supply claims in that market. Supplier balances and unclaimed protocol revenue shares both bear the loss. The same token under another hub has separate accounting. There is no insurance fund or backstop that absorbs the loss before these claims.

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Reduce liquidation exposure

Review health factor after account changes and significant market movements. Repaying debt or adding collateral before health factor reaches 1 can increase the buffer. A buffer reduces exposure to small price changes but does not eliminate liquidation or other protocol risks.