Encyclopedia DeFi · Entry 63
DeFi liquidations: exchanging debt repayment for collateral
In this article
At a glance
Key facts
| Fact | Detail | Source |
|---|---|---|
| Trigger | Eligibility uses the market’s collateral and debt valuation. | [2] |
| Settlement | A liquidation caller supplies debt tokens’ underlying asset and receives collateral. | [1] |
| Competition | Liquidations can create MEV opportunities. | [3] |
A liquidation is a transaction, not just a warning
A monitoring bot or another caller identifies an eligible position and submits a liquidation call. The contract checks its conditions at execution. If accepted, debt is reduced and collateral is transferred according to the rules.
Crossing a threshold makes a position eligible; it does not ensure a liquidation transaction is included instantly. Prices and account state can change between observation and execution.
Separate the repayment from the incentive
In a hypothetical system with a 5% liquidation bonus, a caller repaying 100 quote units of debt receives collateral valued at 105 quote units before other fees, caps or rounding. The borrower loses that collateral and reduces debt by 100. This is a teaching example, not a quoted Aave parameter.
The bonus encourages execution but must be evaluated against gas, sale liquidity and changing prices. A profitable-looking liquidation can fail or cost more than its proceeds. The permitted fraction of debt is also version- and condition-specific, so one fixed close percentage does not describe every market.
Liquidation can leave a remaining position or deficit
A partial liquidation need not close all debt. Recompute the remaining collateral, debt and thresholds to understand the result. Rapid price changes or poor collateral liquidity can leave debt that available collateral cannot fully cover.
A dashboard notification is not the settlement itself. For a historical event, cite the chain transaction, the market settings at that block and the oracle values used. A later configuration should not be used to reinterpret an older liquidation.
Direct answers
Questions people ask
Does liquidation always sell all of the collateral?
No. Repayment limits, available collateral and protocol conditions determine the amount. A position may be partially liquidated, and the exact rules can change across versions and markets.
Inspect the evidence
The answer and key facts have stable claim links. These records retain the scope and qualification when reused.
Liquidation lets an eligible caller repay eligible debt from an unhealthy loan in exchange for collateral under the market’s rules. In Aave-style lending, a health factor below one triggers eligibility. The allowed repayment amount, incentive and remaining position depend on the asset, market and protocol version.
Scope: DeFi. Verification: verified · 2026-10-02T15:08:18.373Z.
Link to this claimTrigger: Eligibility uses the market’s collateral and debt valuation.
Scope: DeFi. Verification: verified · 2026-10-02T15:08:18.373Z.
Link to this claimSettlement: A liquidation caller supplies debt tokens’ underlying asset and receives collateral.
Scope: DeFi. Verification: verified · 2026-10-02T15:08:18.373Z.
Link to this claimCompetition: Liquidations can create MEV opportunities.
Scope: DeFi. Verification: verified · 2026-10-02T15:08:18.373Z.
Link to this claimRevision history
- — First publication after primary-source research and independent automated verification.
- — Before first publication, independent review checked and revised: quickAnswer. Read Aave liquidationCall and current Health Factor & Liquidations help, plus Ethereum MEV liquidations. Recomputed hypothetical100 debt repayment and105 collateral at5% bonus. Found a documentation conflict: Pool page describes fixed0.5 close factor, while current help describes condition-dependent50%/100%. Article intentionally asserts neither as universal. Corrected QA from repay part to repay eligible debt and retained market/version qualifiers.
Source register
Sources and references
Retrieval dates and locators are recorded individually.- Aave V3 PoolAave
Pool operations, collateral restrictions and liquidation settlement.
Locator: supply; withdraw; borrow; repay; liquidationCall · Version / scope: Aave V3 · Retrieved: 2026-10-02Open source - Health Factor & LiquidationsAave
Weighted liquidation thresholds and eligibility below health factor one.
Locator: Health Factor; Managing Health Factor; Liquidation Process · Retrieved: 2026-10-02Open source - Maximal extractable valueethereum.org contributors
Transaction ordering, arbitrage, liquidation and sandwich mechanisms.
Locator: MEV extraction; Examples of MEV · Retrieved: 2026-10-02Open source
Research and drafting use AI assistance. A separate automated review checks claims against primary sources; no external expert or named human review is implied. Publication, substantive editing, source retrieval and verification are recorded separately. This version was independently checked by an automated reviewer on 2 October 2026.
Editorial method and correctionsDegrees of Satoshi editorial project. “DeFi liquidations: exchanging debt repayment for collateral.” Published 2026-10-02; updated 2026-10-02. https://degreesofsatoshi.com/encyclopedia/defi-liquidations/