# DeFi liquidations: exchanging debt repayment for collateral 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. Evidence: [Aave V3 Pool](https://aave.com/docs/aave-v3/smart-contracts/pool); [Health Factor & Liquidations](https://aave.com/help/borrowing/liquidations) Canonical: https://degreesofsatoshi.com/encyclopedia/defi-liquidations/ Published: 2026-10-02 Substantively modified: 2026-10-02 Independently verified by an automated reviewer: 2026-10-02T15:08:18.373Z AI-assisted research and drafting with a separate automated source-verification pass; no external expert or named human review is implied. ## Key facts - **Trigger:** Eligibility uses the market’s collateral and debt valuation. ([Health Factor & Liquidations](https://aave.com/help/borrowing/liquidations)) - **Settlement:** A liquidation caller supplies debt tokens’ underlying asset and receives collateral. ([Aave V3 Pool](https://aave.com/docs/aave-v3/smart-contracts/pool)) - **Competition:** Liquidations can create MEV opportunities. ([Maximal extractable value](https://ethereum.org/developers/docs/mev/)) ## 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. Evidence: [Aave V3 Pool](https://aave.com/docs/aave-v3/smart-contracts/pool); [Health Factor & Liquidations](https://aave.com/help/borrowing/liquidations) ## 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. Evidence: [Aave V3 Pool](https://aave.com/docs/aave-v3/smart-contracts/pool) ## 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. Evidence: [Health Factor & Liquidations](https://aave.com/help/borrowing/liquidations); [Aave V3 Pool](https://aave.com/docs/aave-v3/smart-contracts/pool); [Maximal extractable value](https://ethereum.org/developers/docs/mev/) ## Questions ### 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. Evidence: [Aave V3 Pool](https://aave.com/docs/aave-v3/smart-contracts/pool); [Health Factor & Liquidations](https://aave.com/help/borrowing/liquidations) ## Claims and scope ### defi-liquidations-quick-answer 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: {"collection":"defi","dataAsOf":null,"blockHeight":null} ### defi-liquidations-fact-trigger Trigger: Eligibility uses the market’s collateral and debt valuation. Scope: {"collection":"defi","dataAsOf":null,"blockHeight":null} ### defi-liquidations-fact-settlement Settlement: A liquidation caller supplies debt tokens’ underlying asset and receives collateral. Scope: {"collection":"defi","dataAsOf":null,"blockHeight":null} ### defi-liquidations-fact-competition Competition: Liquidations can create MEV opportunities. Scope: {"collection":"defi","dataAsOf":null,"blockHeight":null} ## Sources - [Aave V3 Pool](https://aave.com/docs/aave-v3/smart-contracts/pool) — Aave. Pool operations, collateral restrictions and liquidation settlement. Locator: supply; withdraw; borrow; repay; liquidationCall. Retrieved: 2026-10-02. - [Health Factor & Liquidations](https://aave.com/help/borrowing/liquidations) — Aave. Weighted liquidation thresholds and eligibility below health factor one. Locator: Health Factor; Managing Health Factor; Liquidation Process. Retrieved: 2026-10-02. - [Maximal extractable value](https://ethereum.org/developers/docs/mev/) — ethereum.org contributors. Transaction ordering, arbitrage, liquidation and sandwich mechanisms. Locator: MEV extraction; Examples of MEV. Retrieved: 2026-10-02. ## Revision history - 2026-10-02: First publication after primary-source research and independent automated verification. - 2026-10-02: 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. ## Cite this entry Degrees 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/