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Repair Windows errors before they cause bigger problemsFix Now →Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Ethereum does not automatically seize collateral the moment a loan becomes risky. In lending protocols such as Aave, a position first becomes eligible for liquidation when it breaches that protocol’s collateral rules; then a liquidator must submit a transaction. The borrower’s debt is reduced by the amount repaid, while the liquidator receives collateral under the protocol’s incentive rules. How much collateral is taken—and whether the remaining position stays open—depends on the protocol, version, market and active parameters.
What liquidation means on Ethereum
Ethereum lending protocols let users deposit assets as collateral and borrow other assets against them. A leveraged position can amplify exposure: for example, someone might deposit ETH and borrow another token while keeping the ETH position open. The loan is supported by collateral rather than by a lender manually assessing the borrower or collecting a conventional debt.
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Liquidation is the protocol’s mechanism for responding when the collateral no longer satisfies the rules for the outstanding debt. It gives an eligible third party an incentive to repay some or all of that debt and claim collateral. This reduces the protocol’s exposure to an undercollateralized loan, but it can cost the borrower collateral beyond the amount of debt repaid because the liquidator receives collateral at a discount or with a bonus.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallThere is no single Ethereum-wide liquidation rule. Aave, Compound and Maker use different mechanisms, and settings may differ among assets, markets and protocol versions. Aave is useful as a concrete example, but its thresholds and liquidation process should not be assumed to apply to another protocol.
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How Aave determines whether a position is eligible
In Aave, the main trigger is the health factor. Aave defines it as:
Health Factor = (Total Collateral Value × Weighted Average Liquidation Threshold) ÷ Total Borrow Value
The health factor combines the value of the supplied collateral, the liquidation thresholds assigned to those assets, and the value of the debt. A factor below 1 makes the position eligible for liquidation. The thresholds are set by Aave governance for each collateral asset; they are not a universal percentage applied to every token.
A worked example
Aave’s help page illustrates the calculation with $10,000 of ETH collateral, an 80% liquidation threshold and $6,000 borrowed. The health factor is 1.333: $10,000 multiplied by 0.80, divided by $6,000. This is Aave’s explanatory example, not a recommended borrowing level or a guarantee that another position with a similar factor is safe.
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What can push the factor down
- The collateral loses value. If ETH’s value falls relative to the borrowed assets, the value supporting the debt shrinks.
- The debt becomes more valuable relative to collateral. This can happen when the borrowed asset rises in price against the collateral asset.
- Interest accrues. The debt can grow over time even if the borrower makes no new transaction.
Aave V3 documentation explains that the factor changes with collateral and debt values, including oracle prices and accrued interest. A factor just above 1 is therefore a snapshot, not a promise against liquidation: prices or debt can move before the borrower or a liquidator acts. Aave cautions that there is no universally safe target because volatility and the relationship between assets vary.
What happens after a position becomes eligible
Eligibility does not itself transfer collateral. A liquidator—a network participant who chooses to act—must submit a transaction and have it successfully executed. Aave describes liquidation as permissionless: it is not reserved for the protocol team or a particular lender. In Aave V3, the liquidator calls liquidationCall, repays debt and receives a proportional amount of the selected collateral under the applicable discount and liquidation bonus rules.
- A position crosses the protocol’s trigger. For Aave, that means its health factor falls below 1. Other protocols may use different criteria or mechanisms.
- A liquidator chooses a debt asset and collateral asset. The transaction acts on the position under the market’s active rules; it is not a manual collection action by an individual lender.
- The liquidator repays debt through the transaction. Depending on the rules and position, the repayment may cover part or all of the relevant debt.
- The protocol transfers collateral to the liquidator. The collateral amount follows protocol parameters, including the liquidation incentive. Aave V3 may deliver the underlying token or its aToken equivalent.
- The resulting position is updated. The borrower’s debt falls by the amount repaid and collateral falls by the amount transferred. A partial liquidation can leave an open position; a larger liquidation can leave little or no position.
Execution is competitive: several liquidators may watch for eligible positions, and the transaction must succeed under network and market conditions. The Bank of Canada’s 2025 staff paper describes liquidators as specialized third parties that commonly use automated bots. It also explains that a liquidator may use a flash loan to fund the repayment. A flash loan is borrowed and repaid within one transaction; if the required repayment does not happen, that transaction does not complete.
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How much can be liquidated in Aave V3?
Aave V3 uses a close factor: a limit on how much debt may be repaid in a liquidation under specified conditions. Aave’s current help page describes the following guidance. These figures concern Aave V3 and can change; they are not rules for every Ethereum protocol or every lending market.
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| Aave V3 condition in Aave’s help guidance | Liquidation amount described | Additional condition |
|---|---|---|
| Health factor above 0.95, with both collateral and debt at least $2,000 | Up to 50% of the debt | A partial liquidation must leave at least $1,000 of both debt and collateral; otherwise the position must be fully cleared. |
| Health factor at or below 0.95, or collateral or debt below $2,000 | Up to 100% of the debt | The same guidance says a partial liquidation must leave at least $1,000 of both debt and collateral, or the position must be fully cleared. |
The $2,000 and $1,000 values are Aave help-page guidance, not stablecoin-independent protocol constants or universal dollar cutoffs across Ethereum. The rule means borrowers should not assume every liquidation will take only a small slice. If a partial repayment cannot satisfy the stated minimum remaining amounts, the position may have to be fully cleared under that guidance.
What the borrower loses—and what may remain
The debt repayment is credited against what the borrower owes, but the borrower also loses the collateral claimed by the liquidator. The collateral transferred is calculated under the protocol’s rules and includes the liquidation incentive, so it is not simply a one-for-one swap of collateral for debt. The size and composition of the loss depend on which asset is repaid, which collateral is selected, the applicable market parameters and how much liquidation is permitted.
After a partial liquidation, the borrower may still have debt and collateral in the protocol. That remainder is not necessarily enough to continue the original strategy or keep the position outside liquidation risk. A later price change or further interest accrual can again make the health factor fall. If the permitted liquidation amount is larger—or the position must be fully cleared—the borrower can lose substantially more collateral than in a partial liquidation.
Liquidation also has transaction and market costs. For borrowers, the relevant practical exposure includes the collateral removed and costs associated with maintaining or adjusting the position. Congestion and execution conditions can matter when time is short. The exact total cost cannot be reduced to a single Ethereum-wide fee or percentage: it depends on the transaction, network conditions and the protocol’s rules.
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How liquidation rules differ across protocols and Aave versions
Liquidation is designed separately by each protocol. The OECD describes Maker’s collateral-sale auctions and contrasts them with the instant liquidation mechanisms and predetermined incentives used by Aave and Compound. Asset parameters and governance settings add further variation, so a comparison should identify the protocol version and market rather than treating a brand name as one unchanging rulebook.
| Protocol or version | Mechanism or trigger established by the cited sources | Important boundary |
|---|---|---|
| Maker | The OECD describes an auction-based sale of collateral. | The cited description does not establish one universal auction parameter for every Maker collateral type or market. |
| Aave V3 | Uses a health-factor trigger and close-factor rules; Aave’s help guidance describes 50% or, under specified conditions, up to 100% liquidation. | Do not apply V3 close-factor guidance to Aave V4. |
| Compound | The OECD describes an instant liquidation mechanism with predetermined incentives. | The cited description does not establish a single current threshold or incentive for every Compound market or version. |
| Aave V4 | Aave announced its Ethereum mainnet launch on March 30, 2026. Its described engine calculates the amount repaid to bring a borrower toward a governance-set Target Health Factor, with a bonus that varies with health factor. | V4 uses its own Hub and Spoke architecture and rules; V3 close factors should not be substituted for its Target Health Factor model. |
What Aave V4 changes
Aave announced V4’s Ethereum mainnet launch on March 30, 2026, with three liquidity hubs and a Hub and Spoke architecture. Spokes have their own collateral types, risk parameters and liquidation rules. Aave’s V4 engine description says the amount repaid can be calculated to bring the borrower to a governance-set Target Health Factor, while the liquidation bonus varies with health factor. That is a different description from the V3 close-factor guidance above, so users need the rules for the exact version and market holding their position.
Aave Labs’ September 2026 development update reported that V4 surpassed $1 billion in deposits during September. That figure is deposits, not the number or value of liquidations, and it should not be read as a liquidation-volume statistic.
Why liquidations can affect more than one borrower
Liquidation helps a lending protocol address undercollateralized positions, but the process can also involve selling the collateral that a liquidator acquires. If sales put pressure on a collateral asset’s price, other positions using that asset may become riskier. BIS working-paper authors Alfred Lehar and Christine A. Parlour report temporary and permanent price impacts from collateral sales associated with liquidations, and describe a feedback loop in which price pressure may contribute to further liquidations.
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A 2026 Bank of Canada staff analytical paper reports that Aave V3 liquidation events tend to cluster in concentrated bursts rather than occurring evenly over time. These findings describe analyzed market behavior, not a guarantee that a particular liquidation will cause a cascade. Whether pressure spreads depends on market conditions, collateral and debt exposures, and the scale and timing of sales. The cited sources do not establish a single current statistic for Ethereum-wide liquidation volume that can be used as a general measure.
How borrowers can monitor and respond to liquidation risk
The most direct ways to improve an Aave health factor are to add eligible collateral or repay part of the debt, options Aave lists in its help guidance. Either changes the inputs to the health-factor calculation, but neither is a guarantee against later price movements or accrued interest. A sensible response depends on the asset pair, the user’s ability to add funds or repay, and the protocol’s active rules.
- Check the correct market and version. Confirm which protocol deployment holds the position and inspect its current asset parameters and liquidation rules; Aave V3 figures do not define Aave V4 behavior.
- Watch both sides of the position. Collateral price declines, borrowed-asset appreciation and interest accrual can each worsen the health factor.
- Leave room for movement and execution. A reading barely above 1 does not protect against a price move or guarantee that a transaction to add collateral or repay will execute in time.
- Understand any automation before relying on it. Aave’s help page lists DeFi Saver as an optional auto-repay tool and points to a health-factor simulator. Such services are not guarantees against liquidation; users need to verify current features and understand transaction and execution risks.
Monitoring software can help surface a changing position, but it cannot remove market risk or ensure a successful transaction. The key distinction is between seeing a risk and having a transaction execute successfully before liquidation conditions are met.
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