When a crypto vault’s collateral falls below its protocol’s liquidation threshold, it becomes eligible for liquidation—but the exact outcome depends on the protocol and version. In Aave V3, a liquidator may repay some or all of the debt and claim collateral with a bonus. In Maker’s documented Multi-Collateral Dai (MCD) system, collateral is sold at auction to cover the vault’s obligations. Liquidation can reduce or remove collateral, and the rules do not guarantee that every borrower’s debt is fully cleared.
What does crossing the threshold mean?
A liquidation threshold is a protocol-defined risk boundary, not one universal crypto price. Aave V3 measures a position with its health factor: the value of collateral multiplied by its weighted average liquidation threshold, divided by the value of borrowed assets. A health factor below 1 makes the position eligible for liquidation. Prices, oracle inputs and accrued interest can change the factor over time. Aave’s overview explains the health factor at Aave’s liquidation guide.
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Eligibility does not mean collateral is necessarily sold at that instant. A third party must execute a liquidation under the applicable protocol rules, and the result depends on the market’s parameters and transaction execution. Aave says thresholds and bonuses vary by reserve and market; its official FAQ is at Aave’s liquidation FAQ.
What happens in Aave V3?
A liquidator repays debt and receives collateral
Aave V3 liquidations are permissionless: an external liquidator can repay debt on the borrower’s behalf and receive collateral, including the applicable liquidation bonus. The bonus compensates the liquidator; it also means the borrower may lose more collateral value than the amount of debt repaid. The reserve-specific threshold and bonus are parameters for the relevant market, not fixed values that apply to every Aave asset.
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How much debt may be repaid?
Aave’s official FAQ describes these close-factor rules for its documented V3 context. When the health factor is above 0.95 and both collateral and debt values are at least $2,000, a liquidator may repay up to 50% of total debt. If the health factor is 0.95 or lower, or either value is below $2,000, up to 100% may be repaid. For a partial liquidation, the FAQ says at least $1,000 of both collateral and debt must remain; otherwise, the position must be fully cleared. These are Aave FAQ parameters, not universal DeFi rules or a promise about every market’s current configuration.
How to interpret a health-factor example
Aave’s FAQ illustrates the calculation with $10,000 of ETH collateral, an 80% liquidation threshold and $6,000 borrowed: the resulting health factor is 1.333. This is an explanatory example, not a recommendation or a current threshold for every asset. Aave also cautions that there is no single health factor that is safe for every position because collateral volatility and its price correlation with the borrowed asset matter.
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What happens in Maker’s documented MCD system?
Maker’s white paper describes a different mechanism. A vault becomes risky when its collateral-to-debt ratio falls below the governance-set liquidation ratio for that collateral type. An auction keeper can initiate liquidation, after which auction participants bid on the collateral. The proceeds are used to cover the vault’s obligations, including the liquidation penalty.
If the auction raises enough, it can stop selling collateral once the obligations are covered, and remaining collateral is returned to the owner. If proceeds are insufficient, the deficit becomes protocol debt. The white paper says the Maker Buffer covers that deficit; if the Buffer lacks enough Dai, a debt auction may mint and sell MKR for Dai. This describes the MCD system in Maker’s white paper, not necessarily every current Maker product or other crypto vault. See the Maker white paper.
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How the two mechanisms differ
| Question | Aave V3 example | Maker documented MCD example |
|---|---|---|
| What makes a position eligible? | Health factor below 1; thresholds vary by reserve and market. | Collateral-to-debt ratio below the collateral type’s governance-set liquidation ratio. |
| Who acts? | Permissionless external liquidators repay debt and claim collateral. | An auction keeper may initiate liquidation, and auction participants bid on collateral. |
| What happens to collateral? | A liquidator receives collateral with the applicable reserve-specific bonus for repaying debt. | Collateral is sold at auction; surplus is returned if proceeds cover obligations. |
| What if proceeds do not cover obligations? | The cited Aave sources do not establish one universal borrower-level shortfall outcome; it depends on the market and implementation. | The documented deficit becomes protocol debt, which the Maker Buffer covers; a debt auction may follow if the Buffer is insufficient. |
Can you prevent liquidation?
Before liquidation, adding collateral or repaying debt can improve an Aave position’s health factor. Aave says repayment generally improves it more than supplying collateral. There is no universally safe health-factor target: volatility, price correlation and market-specific parameters all affect risk. If you are managing a live position, check the current rules and values for the exact protocol, version and market rather than relying on an example threshold or assuming that a particular price will trigger action.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What about Aave V4?
Aave V4’s mutable documentation describes a design with a configurable target health factor: liquidation repayment is calculated to restore that target, replacing V3’s fixed close-factor logic. It also describes a variable liquidation bonus that rises as health factor falls, plus dust safeguards and protocol deficit accounting. This is documented design; deployment status and live configuration must be confirmed before treating it as the behavior of a production market. See the Aave V4 liquidation documentation.
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