Clear DefinitionsLiquidation Threshold
1 min read
Pronunciation
[liq-wid-ay-shun thresh-ohl-d]
Analogy
Like a bank calling your margin loan when your equity falls below 25% of the total position.
Definition
The collateral ratio below which a borrowing position becomes eligible for liquidation, defined as borrowed value divided by collateral value.
Key Points Intro
Liquidation thresholds define risk limits for collateralized lending.
Key Points
Ratio: Borrowed_value / Collateral_value ≥ threshold triggers liquidation.
Per-asset: Each collateral type has its own threshold.
Dynamic: Can change via governance or volatility adjustments.
Health factor: Inverse of threshold used to track position health.
Example
Compound sets a 75% liquidation threshold for ETH collateral; borrowing beyond 75% of ETH value risks liquidation.
Technical Deep Dive
Contract stores `liquidationThreshold[asset]`. On price update, for each position, compute `liquidationPrice = borrowed / (collateral × threshold)`. If current price > liquidationPrice, allow `liquidate()`.
Security Warning
Oracle manipulation can falsely trigger liquidations; use TWAP and redundant feeds.
Caveat
Tighter thresholds reduce risk but limit borrowing capacity.
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