DeFi & governance
Liquidation: the threshold, the execution and the remaining debt
A risk limit being crossed does not ensure collateral can be sold at the reference price.
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People & projects
Eligibility comes first
Lending systems compare collateral value with debt under asset-specific thresholds. Aave describes the health factor as collateral value multiplied by the weighted liquidation threshold, divided by the borrowed value. A ratio below 1 makes the position eligible for liquidation under the protocol's rules.
For example, $12,000 of collateral with a 75% threshold and $8,000 of debt gives a health factor of 1.125. If the collateral falls to $10,000 while debt stays unchanged, the factor becomes 0.9375. This arithmetic identifies eligibility; it does not calculate the exact result of every permitted liquidation.
Execution can create another gap
A liquidator may repay debt and receive collateral plus an incentive. A derivatives venue may instead close positions through its order book or a backstop mechanism. The available liquidity, oracle update and transaction ordering affect the outcome.
If collateral cannot cover the remaining obligation, bad debt must be allocated according to the system's rules. Insurance funds and ADL describe some derivatives mechanisms. The distinction between a liquidation threshold and a bankruptcy price prevents a misleading claim that the protocol always closes a position before it can lose more than its collateral.