Liquidation

The trigger is a threshold. On Aave V3 it is the Health Factor, which combines collateral weighted by its liquidation threshold over total debt: if it falls below 1, the position is liquidable. In a Sky CDP, formerly MakerDAO, the collateral-to-debt ratio is compared against the vault's liquidation ratio. In perpetuals, the trigger is the maintenance margin measured against the mark price. The close factor sets how much debt a liquidator can repay at once: on Aave V3 it can reach 100 percent if the Health Factor falls below 0.95, versus 50 percent on V2. The liquidator receives collateral with a liquidation bonus, which is also a cost to the borrower.

It is the mechanism that keeps protocols solvent and loans backed. For anyone who lends or supplies collateral, it defines the real risk of losing the guarantee, which is why understanding one's own threshold is sound position-management practice.

Real examples include Aave, Compound and Sky in lending and CDPs, and perpetual decentralized exchanges such as GMX, dYdX or Hyperliquid for leveraged positions. Liquidators are usually bots that sometimes fund the operation with a flash loan. Liquidation is the counterpart of overcollateralization, since it defines the point where the collateral buffer runs out, and it applies equally to CDPs, money markets and perpetuals.