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Liquidation is the automatic, forced sale of your crypto collateral when your loan crosses the platform's liquidation threshold — typically around 70–80% of collateral value on major protocols. It's the central risk of borrowing against crypto, and its distance is set by one number you control: your loan-to-value ratio. This is educational content, not personalized financial advice; confirm your situation with a licensed professional.
Every lending protocol continuously computes one ratio: your debt divided by your collateral's current value, compared against the liquidation threshold. The moment your position crosses it, liquidation becomes available to anyone — on DeFi platforms, independent actors called liquidators race to repay part of your debt in exchange for your collateral at a discount.
Note what's absent: discretion. Nobody reviews your case or waits for a bounce. The mechanism's ruthlessness is also why DeFi lending survived 2022 while discretionary centralized lenders failed — but it means the only protection is the one you build in advance.
The distance to liquidation is pure arithmetic. Using a 78% liquidation threshold — a typical figure for major collateral on Aave; verify the live parameter for your asset — here's the drop required at each starting LTV on a $100,000 position:
| Starting LTV | Borrowed | Liquidation begins when collateral hits | Price drop required | Character of that drop |
|---|---|---|---|---|
| 25% | $25,000 | ~$32,000 | ~68% | Beyond even 2022's peak-to-trough |
| 35% | $35,000 | ~$45,000 | ~55% | A full historic bear market |
| 50% | $50,000 | ~$64,000 | ~36% | Has happened in single quarters |
| 60% | $60,000 | ~$77,000 | ~23% | An ordinary correction |
| 70% | $70,000 | ~$90,000 | ~10% | A bad week |
Read the last column twice. The difference between a position that survives a historic crash and one destroyed by a bad week isn't the platform, the asset, or luck — it's the LTV chosen on day one. Interest accrual also nudges LTV upward over time, so a position opened at 35% drifts higher if left unattended for years.
Borrowing at 30–40% LTV puts a 50%+ crash between you and liquidation. Everything else on this list is secondary to this single decision, made before any risk exists.
Set price alerts at levels well above your liquidation price — for example, alerts at a 15% and a 30% drawdown — so response time is measured in days, not minutes. Every major platform shows your live liquidation price; know yours.
The two responses to a falling market are repaying part of the loan or adding collateral. Both require having assets ready and deciding before the stress which one you'll use. A plan made during a 40% crash is not a plan.
A conservative position needs minutes per week, not constant vigilance. The failure mode isn't watching too little — it's opening an aggressive position that demands watching, then living with the stress it produces.
How OverseasDeFi thinks about this. Liquidation risk is the honest cost of the borrow-don't-sell strategy, and we refuse to teach the strategy without teaching the table above first. Our rule for the professionals we work with: size the loan so a repeat of the worst crash you've lived through is survivable without action. At that sizing, borrowing against crypto is a calm, occasionally-checked position — not a second job watching charts.
Liquidation triggers when your debt rises above the platform's liquidation threshold as a percentage of your collateral's value — either because the collateral's price fell or accrued interest grew the debt. The protocol then sells collateral automatically; no human decides, and no warning call comes first.
It depends entirely on your loan-to-value ratio. At 35% LTV with a typical 78% liquidation threshold, Bitcoin must fall roughly 55% before liquidation. At 60% LTV, about 23% — an ordinary correction. The borrower sets this distance, not the platform.
Usually not. Most DeFi protocols sell only enough collateral to bring the position back to health, plus a liquidation penalty that typically runs several percent. It's a forced partial sale at a bad price and a taxable event — costly, but rarely a total loss.
Four defenses: borrow at a conservative loan-to-value ratio (30–40%), set price alerts well above your liquidation price, keep repayment funds or extra collateral ready to deploy, and check the position on a schedule. Conservative sizing does most of the work; the rest is monitoring.
Educational content only. Nothing on this page is personalized financial, tax, or investment advice, and OverseasDeFi is not a licensed financial advisor. Liquidation thresholds, penalties, and rates are set per-asset by each protocol's governance and change over time — verify live parameters before borrowing. Table figures are illustrative arithmetic, not predictions. DeFi involves risk, including loss of principal.