Plain English
A liquidation is what happens when the collateral backing your loan falls below the protocol’s required ratio. The protocol auctions off enough of your collateral to bring the position back into safety, charges you a penalty, and the bot or liquidator that triggered it pockets a fee.
How it actually works
Each lending protocol has a liquidation threshold (e.g., 82.5% LTV on ETH at Aave). If your LTV crosses it, your position is “liquidatable” — anyone can call the contract to seize a portion of collateral, repay part of the debt, and collect the liquidation bonus (typically 5–10%). The protocol stays solvent; the borrower pays the price.
What it means for you
Liquidations are how HNW crypto loans go wrong. Setting a conservative LTV (e.g., 30%) instead of the maximum 75% means you can survive a 60% drawdown without liquidation. For “buy-borrow-die” style structures, leaving wide buffers and using stablecoin debt rather than volatile-denominated debt is the standard discipline.
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Educational content only. Not investment, tax, or legal advice.