What a DeFi liquidation does to your loan

You deposited crypto as collateral and borrowed against it. If the loan's health falls far enough, the protocol can let someone else repay part of the debt and take some of that collateral. That event is a liquidation. It is not a bank foreclosure, and it does not wait for a human collections call.

This article explains the idea in plain language using Aave's published help pages for V3-style markets. Other protocols, and other Aave versions, use different formulas. It is not personalized advice, and it does not name a safe buffer.

Collateral, debt, and health factor

Collateral is the crypto you lock so you can borrow. Debt is what you owe. Aave's liquidation help page defines health factor as the value of your collateral, multiplied by a weighted average liquidation threshold, divided by your borrow.

Aave's example: $10,000 of ETH as collateral with an 80 percent liquidation threshold, and $6,000 of debt, produces a health factor of 1.333. If the health factor falls below 1, the position is eligible for liquidation.

There is no universally safe health factor. Aave says you can improve the number by adding collateral or by repaying debt. Price moves, interest accrual, and liquidity can still push it down after you check it.

What a liquidator can take

When a position is eligible, a liquidator may repay part of the debt and receive collateral plus a bonus. On Aave V3, the close factor (the share of debt that can be repaid in that liquidation) depends on how far health has fallen and on the size of the position.

Aave's help page says the liquidator can repay up to 50 percent of the debt if the health factor is still above 0.95 and both collateral and debt are at least $2,000. The liquidator can repay up to 100 percent if the health factor is 0.95 or below, or if either collateral or debt is under $2,000. Those figures are Aave V3 help-page rules. They can differ by market and by version.

Aave V3's overview says liquidators repay part of the debt in exchange for collateral at a discount, and that parameters are set per reserve. Do not mix this with Aave V4, which uses a different model.

Other protocols use different rules

Compound III, for example, uses liquidation collateral factors that are higher than borrow collateral factors. Documentation there describes an absorb process in which the protocol can take the debt and return remaining collateral minus a penalty, paid in the base asset. The word liquidation does not mean the same mechanic everywhere. Read the protocol in front of you.

What you can check first

Before you borrow, and while a loan is open, check four things on the protocol's own screen: how large the debt is, what the collateral is worth, whether the market still has available liquidity, and what the protocol's own health metric currently shows. Aave's borrowing pages tell users to monitor health factor, and they describe these markets as overcollateralized, meaning you must lock more value than you borrow.

Those checks do not guarantee you will avoid liquidation. They tell you whether the position is already close to the protocol's threshold. This article does not recommend a buffer, a token, or a loan size.

Sources

Aave Help, liquidations: https://aave.com/help/borrowing/liquidations
Aave Help, borrowing: https://aave.com/help/borrowing
Aave Help, borrow tokens: https://aave.com/help/borrowing/borrow-tokens
Aave V3 overview: https://aave.com/docs/aave-v3/overview
Compound III liquidation: https://docs.compound.finance/liquidation/

Disclosure: This article is educational coverage of dated Aave V3 help pages and notes that other protocols differ. It does not recommend a loan, a buffer, or a token, and formulas can vary by market and version. The accompanying illustration is generated editorial art, not a photograph of a real position. This article is not financial, legal, or investment advice. AI-assisted research and writing. Cited sources, not AI alone, support the claims.