⚠️ Collateral Risk & Health Factors
Understand LTV ratios and how to avoid liquidation
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0 / 5 completed⚠️ Collateral & Liquidation Risk
Understanding collateralization and liquidation is crucial for safe DeFi borrowing. Let's explore how collateral protects lenders and what triggers liquidations.
Why Over-Collateralization?
DeFi lending requires more collateral than you borrow (typically 150-200%) because there are no credit checks or legal recourse. If you default, the protocol liquidates your collateral to protect lenders.
Collateral = Trust
In traditional finance, your credit score is trust. In DeFi, over-collateralization is trust. The protocol doesn't know you—it only trusts the value locked in the smart contract.
🎮 Interactive: Risk Scenarios
Explore different risk levels based on collateralization:
Safe Position
Conservative borrowing with high collateralization
Borrowed $10k with $25k collateral (40% LTV). Large price buffer before liquidation risk.
🎮 Interactive: Liquidation Calculator
See how price changes affect your position health:
Your position is well-collateralized with a safe buffer.
Liquidation Mechanics
Automated Liquidators
Bots constantly monitor all positions. When health factor < 1.0, they trigger liquidation by repaying your debt and claiming collateral at a discount.
Partial vs Full Liquidation
Most protocols liquidate just enough collateral to bring your health factor back above 1.0 (partial). Some liquidate entire positions (full).
Cost of Liquidation
You lose the liquidation penalty (5-15%) plus any remaining collateral if fully liquidated. Always maintain buffer above liquidation threshold.
Collateral Types & Factors
| Asset | Max LTV | Liq. Threshold | Liq. Penalty | Risk Level |
|---|---|---|---|---|
| ETH | 82.5% | 86% | 5% | Low |
| wBTC | 75% | 80% | 6.25% | Low |
| USDC | 87% | 89% | 4.5% | Very Low |
| LINK | 70% | 75% | 10% | Medium |
| Small Cap Alt | 50% | 60% | 15% | High |
Best Practices to Avoid Liquidation
- •Keep health factor >1.5 at all times (2.0+ for safety)
- •Set price alerts for your collateral assets
- •Don't max out borrowing capacity—leave buffer room
- •Use stablecoins as collateral for lower volatility
- •Monitor position daily during volatile markets