Glossary · L
Liquidation Ratio
The minimum collateral ratio a borrowing position must maintain in a DeFi lending protocol before it becomes eligible for liquidation. Also called the Liquidation Threshold. For example, if AAVE's liquidation threshold for ETH is 82%, a position with $100 in ETH collateral can be liquidated if the borrow amount exceeds $82. Liquidation ratios vary by collateral type — more volatile assets have lower (more conservative) thresholds.
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How Liquidation Ratio works in practice
The liquidation ratio is the collateral-to-debt level at which a position becomes eligible for liquidation. It is set per collateral type, and it is set by how volatile and how liquid that asset is — the two things that determine whether a liquidator can actually exit.
Worked example
A 150% liquidation ratio means 1,500 of collateral is required for every 1,000 of debt. Borrowing 1,000 against 2,000 of ETH gives a 200% ratio; ETH would need to fall 25% before liquidation becomes possible.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
The ratio is not the same for every asset. Volatile or thinly traded collateral carries a stricter requirement, and protocols tighten ratios during stress — the number you borrowed against is not guaranteed to be the number tomorrow.
Liquidation Ratio: common questions
- What is Liquidation Ratio?
- The minimum collateral ratio a borrowing position must maintain in a DeFi lending protocol before it becomes eligible for liquidation. Also called the Liquidation Threshold. For example, if AAVE's liquidation threshold for ETH is 82%, a position with $100 in ETH collateral can be liquidated if the borrow amount exceeds $82. Liquidation ratios vary by collateral type — more volatile assets have lower (more conservative) thresholds.
- How does Liquidation Ratio work in practice?
- The liquidation ratio is the collateral-to-debt level at which a position becomes eligible for liquidation. It is set per collateral type, and it is set by how volatile and how liquid that asset is — the two things that determine whether a liquidator can actually exit.
- Can you give an example of Liquidation Ratio?
- A 150% liquidation ratio means 1,500 of collateral is required for every 1,000 of debt. Borrowing 1,000 against 2,000 of ETH gives a 200% ratio; ETH would need to fall 25% before liquidation becomes possible.
- What do people get wrong about Liquidation Ratio?
- The ratio is not the same for every asset. Volatile or thinly traded collateral carries a stricter requirement, and protocols tighten ratios during stress — the number you borrowed against is not guaranteed to be the number tomorrow.