iTechGuides is reader-supported. When you buy through links on our site, we may earn an affiliate commission. As an Amazon Associate I earn from qualifying purchases. Learn more
When an Ethereum lending position no longer meets its protocol’s collateral rules, it may become eligible for liquidation. A liquidator—not the protocol acting by itself—must submit a transaction to repay some or all of the debt and receive collateral under that protocol’s rules. The borrower’s debt falls, but so does their collateral, and the position may be left smaller or closed entirely.
There is no single Ethereum-wide liquidation formula. Aave V3, Aave V4, Maker and Compound use different mechanisms and parameters. The details below use Aave as a concrete example and distinguish its versions from other protocols.
What liquidation means
Leveraged lending lets someone borrow against assets they have deposited as collateral. The position remains acceptable only while its collateral meets the lending protocol’s risk requirements. If the position falls below those requirements, liquidation gives a third party an incentive to repay debt and take some collateral, helping the protocol address an undercollateralized loan.
For the borrower, liquidation is not simply a warning or a lender manually seizing assets. It is an on-chain transaction that changes the position: debt is repaid, collateral is transferred to the liquidator, and the borrower may retain a reduced position. Whether the position stays open depends on how much is repaid and what remains afterward.
#1 Best Overall
- Effortlessly build your crypto portfolio via the all in one Ledger Wallet app: buy, sell, send, receive, swap, stake and more across popular blockchains. 15,000+ coins & tokens in a single dashboard. Keep a close eye on the market. Compare service providers. Track performance. Get timely alerts. Build your portfolio with confidence.
- Effortlessly build your crypto portfolio via the all in one Ledger Wallet app: buy, sell, send, receive, swap, stake and more across popular blockchains. 15,000+ coins & tokens in a single dashboard. Keep a close eye on the market. Compare service providers. Track performance. Get timely alerts. Build your portfolio with confidence.
- Enjoy Bluetooth connectivity, iOS access, and hours of battery use with this mobile-first, secure backup signer. Freedom you can depend on.
- Genuine Check: confirm your signer is authentic during setup with the Ledger Wallet app.
- Protect your signer: keep it in mint condition at all times with a bespoke Pod or Case to avoid scratches and everyday wear and tear.
Eligibility and execution are separate. A position can meet the protocol’s liquidation condition without being liquidated immediately; a liquidator must still submit a successful transaction. Aave describes its liquidations as permissionless: any network participant can initiate one when a borrow position is eligible. That does not mean every eligible position will be acted on at the same instant.
How Aave V3 determines whether a position is eligible
Aave V3 uses a health factor. Its formula is:
Health Factor = (Total Collateral Value × Weighted Average Liquidation Threshold) ÷ Total Borrow Value
A health factor below 1 makes the position eligible for liquidation. The weighted average liquidation threshold reflects the thresholds of the collateral assets in the position; Aave governance sets a threshold for each collateral asset. A position with several collateral assets therefore does not necessarily have one simple threshold that applies to every asset.
Quick wins for a faster PC:
Clear out junk files and repair common Windows errorsFree Scan →Scan for outdated or missing drivers - takes under a minuteDriver Scan →Repair Windows errors before they cause bigger problemsFix Now →Worked example
Aave’s help page illustrates the calculation with $10,000 of ETH collateral, an 80% liquidation threshold and $6,000 borrowed:
($10,000 × 0.80) ÷ $6,000 = 1.333
This is an example of the calculation, not a recommended target or a universal safety margin. A health factor can change as market values and debt change. In Aave V3, collateral and debt values are affected by prices from oracles and accrued interest, as described in Aave’s V3 documentation.
Rank #2
- Proven security at scale: Over 9 years and millions of cards issued with no known remote hacks, while military‑grade EAL6+ security keeps your private keys locked inside the chip. Your cryptocurrencies stay strongly protected from online attackers.
- Tap once to manage your entire crypto wallet across 90 blockchains - no USB cables or Bluetooth, no batteries, no setup. Access 14,100+ coins & tokens, DeFi, NFTs, and staking instantly from your phone
- Smart backup: Use your second Tangem Wallet as your Backup keys with end‑to‑end encryption; no more papers, pictures. If one card is lost, the remaining can still restore full access, with an optional seed phrase available for advanced users.
- Engineered to last up to 25 years: Waterproof (IP69K), shockproof and tested for extreme temperatures from −25°C to 50°C. A durable cold wallet with long‑term protection and independently audited security.
- Trusted by 6 million users worldwide (4.9 App Store, 4.8 Google Play) - buy, sell, swap, stake, and spend cryptocurrency directly. The secure offline storage wallet designed for how people actually use crypto wallets
What can push the health factor down
- Collateral loses value. If the collateral’s market value falls relative to the debt, the numerator of the calculation declines.
- The borrowed asset rises relative to the collateral. The amount owed may be worth more when measured against the collateral.
- Interest accrues. As the debt grows, the denominator increases even if the borrower makes no new transaction.
These changes can occur together. For example, a falling collateral price and rising debt value can reduce the health factor from both directions. A number just above 1 is not a guarantee that a position will avoid liquidation: prices can move, debt can accrue, and transaction execution has its own timing and conditions. Aave cautions that there is no universally safe health-factor target because volatility and correlations differ among assets.
What happens in an Aave V3 liquidation
When an Aave V3 position is eligible, a liquidator can call the protocol’s liquidationCall function. The liquidator repays some or all of the selected debt and receives a proportional amount of the selected collateral at a discount that includes a liquidation bonus. Depending on the transaction and protocol rules, the liquidator may receive the underlying collateral token or its aToken equivalent.
- The position crosses the eligibility threshold. In Aave V3, this means its health factor is below 1.
- A liquidator chooses a debt and collateral asset. The transaction acts on the eligible position under the protocol’s rules; the borrower does not have to approve that liquidation transaction.
- The liquidator repays debt. The repayment reduces what the borrower owes by the amount repaid.
- Collateral is transferred. The liquidator receives collateral according to the applicable collateral value, liquidation bonus and close-factor rules.
- The remaining position is recalculated. It may be left open with less debt and collateral, or it may be fully cleared.
Liquidators commonly use automated bots, according to a 2025 Bank of Canada staff paper. They may use flash loans to fund a liquidation: a flash loan must be borrowed and repaid within one transaction. If repayment cannot be completed, that transaction does not complete. This is one way liquidation can be executed without a liquidator having to hold the full repayment amount in advance, but it does not remove the requirement that the transaction succeed.
How much collateral can be taken?
Aave’s current help guidance describes the following Aave liquidation limits. These are Aave-specific figures, not rules for every Ethereum lending protocol or every market. The rules and parameters can change, so a borrower should check the applicable market’s current settings rather than treat these figures as permanent.
| Aave guidance condition | Liquidation amount described |
|---|---|
| Health factor above 0.95, with collateral and debt each at least $2,000 | Up to 50% of the debt |
| Health factor at or below 0.95, or collateral or debt below $2,000 | Up to 100% of the debt |
| A partial liquidation would leave less than $1,000 of debt or collateral | The position must be fully cleared rather than left below that minimum |
The practical implication is that a borrower should not assume a liquidation will take only a small, harmless portion. Under the cited Aave guidance, the eligible amount can be as high as the full debt in specified circumstances, and a small position may have to be cleared rather than partially liquidated. Even after a partial repayment, the collateral left behind may not be sufficient for the borrower’s original strategy.
Rank #3
- Proven security at scale: Over 9 years and millions of cards issued with no known remote hacks, while military‑grade EAL6+ security keeps your private keys locked inside the chip. Your cryptocurrencies stay strongly protected from online attackers.
- Tap once to manage your entire crypto wallet across 90 blockchains - no USB cables or Bluetooth, no batteries, no setup. Access 14,100+ coins & tokens, DeFi, NFTs, and staking instantly from your phone
- Smart backup: Use your second Tangem Wallet as your Backup keys with end‑to‑end encryption; no more papers, pictures. If one card is lost, the remaining can still restore full access, with an optional seed phrase available for advanced users.
- Engineered to last up to 25 years: Waterproof (IP69K), shockproof and tested for extreme temperatures from −25°C to 50°C. A durable cold wallet with long‑term protection and independently audited security.
- Trusted by 6 million users worldwide - buy, sell, swap, stake, and spend cryptocurrency directly. The secure offline storage wallet designed for how people actually use crypto wallets
The borrower’s debt is reduced by the repayment, but the liquidator receives collateral under the applicable discount and bonus rules. That means the borrower does not simply exchange one asset for an equal-value reduction in debt: the liquidation bonus and transaction conditions affect the amount of collateral transferred. The exact result depends on the protocol version, market, assets, position and parameters active when the transaction executes.
Recommended Free Tools
Aave V3, Aave V4 and other protocols do not share one rulebook
“Ethereum liquidation” describes a family of protocol mechanisms, not one network-level process. The OECD distinguishes auction-based collateral sales, such as Maker’s, from instant liquidation mechanisms with predetermined incentives, such as those it describes for Aave and Compound. The following comparison is limited to what those descriptions establish; it is not a complete specification of each protocol’s current markets.
| Protocol or version | Mechanism established by the cited description | Position rule described |
|---|---|---|
| Aave V3 | Liquidator repays debt and receives selected collateral, potentially as the underlying token or aToken equivalent, with a liquidation bonus | Health-factor trigger; generally a 50% close factor, with Aave guidance allowing 100% under specified conditions |
| Aave V4 | Aave describes a liquidation engine in which repayment can be calculated to bring a borrower to a governance-set Target Health Factor; the bonus varies with health factor | Target Health Factor is governance-set; the cited description does not give one universal target value |
| Maker | Collateral sale through an auction-based mechanism | The cited OECD description does not specify a single trigger or close factor |
| Compound | Instant liquidation with predetermined incentives, as described by the OECD | The cited OECD description does not specify a single close factor |
Aave announced that V4 launched on Ethereum mainnet on 30 March 2026. Its architecture has three liquidity hubs and uses a Hub and Spoke design: spokes have their own collateral types, risk parameters and liquidation rules. A V4 position therefore should not be analyzed by applying V3’s close-factor examples. The V4 repayment-to-target-health-factor description is also distinct from the V3 rules above.
Aave Labs reported that Aave V4 exceeded $1 billion in deposits during September 2026. That is a deposit figure, not a measure of liquidation value or frequency, and it should not be read as an Ethereum-wide liquidation statistic.
What the borrower may lose—and what may remain
A liquidation reduces the borrower’s debt by the amount the liquidator repays, while transferring collateral to the liquidator under the protocol’s rules. The resulting position may still be open. If it is, the borrower has less collateral and less debt, and should reassess whether the remaining position is still viable rather than assume the original strategy can continue unchanged.
Do these 3 things before closing this tab:
1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problemsRank #4
- EAL5+ CERTIFIED SECURE ELEMENT + FINGERPRINT PROTECTION — Your private keys stay encrypted offline on a certified EAL5+ chip, the same security tier used in EMV bank cards. Built by DCENT, securing crypto since 2018. Fingerprint authentication adds a second layer no PIN-only wallet can match.
- 10,000+ ASSETS NATIVE ON 100+ BLOCKCHAINS — Hold Bitcoin, Ethereum, XRP, Solana, Cardano, popular stablecoins (USDT, USDC), and NFTs in one wallet. No third-party apps, no fragmented setup — every supported asset works straight out of the box.
- TAP-TO-SIGN MOBILE EXPERIENCE — Pair your wallet with the DCENT mobile app over Bluetooth. Manage tokens, review transactions, and access in-app swap features directly from your phone — no cables, no desktop required.
- WEB3 & dAPP ACCESS VIA METAMASK — Connect to MetaMask and other browser extension wallets to manage NFTs, claim airdrops, and access dApps. A large screen and intuitive 4-button interface keep every transaction clearly visible before you sign.
- SEAMLESS FIRMWARE UPDATES & 30-DAY MONEY-BACK GUARANTEE — Apply security updates without resetting your wallet or migrating funds. Backed by Amazon's 30-day money-back guarantee — your purchase is risk-free.
Depending on the protocol and the position, a liquidation may be partial or may clear the debt and collateral entirely. Aave’s current guidance allows up to 100% liquidation in the conditions shown above and requires full clearance when a partial liquidation would leave less than $1,000 of debt or collateral. Those thresholds are Aave guidance and can change; they are not a promise that every liquidation on Ethereum will follow the same pattern.
The financial impact can include losing collateral at a discount, as well as costs associated with the position and its transactions. Volatile collateral, debt-value changes, interest accrual, network congestion and execution conditions all matter. The final outcome depends on the transaction that executes and the rules active for that market at that time; an eligibility threshold alone does not determine a borrower’s exact loss.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why liquidations can affect markets beyond one borrower
Liquidation lets a lending protocol respond to undercollateralized positions, but the collateral received by a liquidator may then be sold. Research by Bank for International Settlements working-paper authors Alfred Lehar and Christine A. Parlour reports temporary and permanent price impacts from collateral sales related to liquidations. Their analysis describes a possible feedback loop: sales can add price pressure, which may make other positions more vulnerable and contribute to further liquidations.
A 2026 Bank of Canada staff analytical paper reports that Aave V3 liquidation events tend to happen in concentrated bursts rather than being evenly distributed over time. Bursts and price feedback are reasons liquidation risk can rise quickly during stressed conditions. They do not establish that every individual liquidation causes a market-wide cascade, or that a cascade will occur whenever liquidations cluster.
Ways to respond before a position becomes eligible
For an Aave position, the direct ways to improve its health factor are to add collateral or repay part of the debt. Aave’s help guidance identifies both actions. They address the calculation differently: adding eligible collateral can raise collateral value, while repayment reduces the amount owed. Neither is a guarantee against future liquidation, since prices and interest can continue to change.
Best Value
- Dual-chip architecture for maximum protection: The next-gen, fully auditable TROPIC01 chip works alongside a certified EAL6+ Secure Element—completely NDA-free—to deliver radically transparent, industry-leading defense against physical attacks.
- Quantum-ready security: Get protection against future threats with the first-ever hardware wallet designed with quantum-ready architecture.
- See every detail with confidence: Our largest high-resolution color touchscreen makes it easy to navigate your assets, review transactions and manage your coins with clarity.
- Wireless freedom with encrypted Bluetooth control: Manage, buy, swap and stake securely using Trezor Suite on desktop or mobile. Qi2-compatible wireless charging keeps your Trezor powered up. No cables required—security meets convenience.
- Works seamlessly with Android, iOS and desktop: Connect wirelessly or via USB-C to your phone or computer. Manage your crypto anywhere with our companion Trezor Suite app.
- Check the position and its market inputs. Review collateral value, debt value, interest accrual and the applicable liquidation threshold for each asset. Do not assume a familiar threshold from another asset or market applies.
- Consider reducing leverage. Repaying debt directly reduces the borrow amount. Adding collateral increases the assets supporting the position, subject to that asset’s protocol rules.
- Allow for rapid changes and execution costs. A position close to the threshold may become eligible before a manual response is completed, particularly if prices move quickly or the network is congested.
- Understand any automation before relying on it. Aave’s help page lists DeFi Saver as an auto-repay tool and points to a health-factor simulator. These are optional services, not guarantees against liquidation; verify current features and account for transaction and execution risks.
There is no safe universal health-factor number to substitute for understanding the collateral, debt and market. Aave itself notes that asset volatility and correlation differ. The useful question is whether the position can withstand adverse price moves and debt growth—not simply whether its current displayed factor is above 1.
Common misunderstandings
“If I am eligible, the protocol automatically takes my collateral.”
Eligibility makes a position available for liquidation under protocol rules; a liquidator still has to submit a successful transaction. It is not a manually initiated seizure by a lender, nor is crossing the threshold itself the complete liquidation transaction.
“A liquidation always closes the whole position.”
Not necessarily. A partial liquidation can leave a smaller position open. Aave’s close-factor guidance also permits full liquidation under specified conditions, including certain small positions. Other protocols use their own rules.
What’s actually slowing this PC down?
Pick the symptom - the matching free tool is one click away.
“A liquidation always takes only a small amount.”
That is not a safe assumption. Aave’s guidance describes circumstances in which up to 100% of debt can be liquidated, and a partial repayment may have to clear a position if it would leave less than the stated debt or collateral minimum.
“The Aave V3 formula applies to every Ethereum lending position.”
It does not. Protocols differ in triggers, incentives, close factors and execution methods. Aave V4 also has a distinct liquidation-engine description, and its spokes can have their own parameters and rules.
“Every liquidation triggers a market crash.”
Liquidation-related collateral sales can affect prices, and research has identified price feedback and concentrated Aave V3 liquidation bursts. Those findings describe risks and observed behavior; they do not mean that every event causes a broader cascade.
Quick Recap
Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.
