Liquidation Threshold
The liquidation threshold is the debt-to-collateral ratio at which a loan becomes eligible for liquidation because the collateral no longer covers it safely. Once your debt crosses that line, anyone can repay part of it and take some of your collateral at a discount.
Threshold versus maximum loan-to-value
Lending protocols set two related limits per collateral asset. The maximum loan-to-value (LTV) is how much you may borrow when you open or increase a loan. The liquidation threshold is higher and marks the point at which the position can be liquidated. The gap between them is your safety buffer.
Volatile assets get lower thresholds than stable ones, because their value can fall faster before a liquidation completes. Prices come from oracles, so it is the oracle price, not the price on your favourite exchange, that counts.
How the health factor uses it
Protocols such as Aave summarise a position with a health factor: collateral value multiplied by the liquidation threshold, divided by debt. Above 1 the loan is safe; at or below 1 it can be liquidated. A liquidator then repays part of the debt and receives collateral worth more than they paid, the difference being a liquidation bonus that comes out of your collateral.
A worked example
Say you deposit 10 ETH at 2,000 dollars, worth 20,000 dollars, and borrow 12,000 USDC. Assume a maximum LTV of 75% and a liquidation threshold of 80%. You could have borrowed up to 15,000, and your health factor is 20,000 times 0.8 divided by 12,000, about 1.33. Liquidation starts when 80% of your collateral equals your debt, so when the collateral is worth 15,000 dollars, an ETH price of 1,500 dollars. A 25% fall is enough. With a 5% bonus, a liquidator repaying 6,000 USDC would take about 6,300 dollars of your ETH.
How people get liquidated and how to avoid it
Most liquidations come from borrowing close to the maximum and then not watching the position during a sharp drop. Sudden crashes can trigger cascades, where liquidations push prices lower and trigger more liquidations. Interest also accrues on your debt, slowly pushing you towards the threshold.
Keep a wide margin, decide in advance at what health factor you will repay or add collateral, and check the protocol's parameters for your specific asset, since they differ and can be changed by governance.
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Frequently asked questions
What is the difference between LTV and liquidation threshold?
LTV is your current debt divided by collateral value, and maximum LTV caps how much you can borrow. The liquidation threshold is the higher ratio at which the loan can be liquidated.
Will I lose all my collateral if I cross the threshold?
Usually not. Many protocols liquidate only part of a position at a time, but you lose the liquidation bonus on that part, and in a fast crash several rounds can follow.
Can the liquidation threshold change?
Yes. Governance or risk managers can adjust parameters for an asset, which can move existing positions closer to liquidation.
Related terms
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