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1Repair Windows errors before they cause bigger problems2Fix the driver behind crashes, sound loss and screen glitches3Clear out junk files and repair common Windows errorsWhen collateral falls below a crypto vault’s liquidation threshold, the position becomes eligible for liquidation under that protocol’s rules. That does not mean every vault is immediately sold in the same way. In Aave V3, a third-party liquidator may repay some of the debt and receive collateral plus a bonus; in Maker’s documented MCD model, collateral is sold through an auction. The exact outcome depends on the protocol, version, market settings, prices and execution.
What does “below the liquidation threshold” mean?
A liquidation threshold is a protocol rule for assessing whether a collateral-backed borrowing position has become too risky. It is not one universal price or percentage that applies across crypto lending. Protocols use different calculations and mechanisms, and their parameters can vary by asset and market.
For Aave V3, the relevant measure is the health factor: total collateral value multiplied by the weighted average liquidation threshold, divided by total borrow value. A health factor below 1 makes a position eligible for liquidation. The factor can change as collateral and debt prices move or interest accrues.
In Maker’s documented MCD system, the protocol compares a vault’s collateral-to-debt ratio with the governance-set liquidation ratio for that collateral type. Falling below that ratio makes the vault eligible for liquidation under the documented rules.
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What happens in Aave V3?
A liquidator may repay debt and claim collateral
Aave V3 liquidations are permissionless: an external liquidator can repay debt on the borrower’s behalf and receive collateral with a reserve-specific liquidation bonus. The applicable threshold and bonus depend on the reserve and market. Aave’s FAQ describes liquidations as competitive activity; liquidators may monitor oracle prices, balances and protocol parameters using bots or scripts. That is a description of liquidator activity, not a tool a borrower needs to buy.
How much can be liquidated?
Aave’s FAQ describes the following close-factor rules for its documented context. They are not universal DeFi limits, and current market settings should be checked before relying on exact parameters.
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| Documented Aave V3 condition | Maximum debt that may be liquidated |
|---|---|
| Health factor above 0.95, with both collateral value and debt value at least $2,000 | Up to 50% of total debt |
| Health factor at or below 0.95, or collateral value or debt value below $2,000 | Up to 100% of total debt |
The same FAQ says a partial liquidation must leave at least $1,000 of both collateral and debt; otherwise, the position must be fully cleared. These dollar limits and close-factor rules are specific to the FAQ’s documented context, not a promise that every Aave market uses identical live settings.
Illustrative health-factor calculation
Aave’s FAQ gives an example of $10,000 in ETH collateral at an 80% threshold and $6,000 borrowed. The resulting health factor is 1.333. This is an illustration, not a recommendation or a current threshold for every asset.
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What happens in Maker’s documented MCD model?
Collateral is sold through an auction
In the MCD system described in Maker’s white paper, an auction keeper can detect and initiate liquidation, and participants bid on the collateral. Auction proceeds are used to cover the vault’s obligations, including the liquidation penalty. If enough is raised, the auction can shift to selling as little collateral as possible, and the remaining collateral is returned to the owner.
What if the auction proceeds are insufficient?
If the auction does not raise enough to cover the obligations, the deficit becomes protocol debt. The Maker Buffer covers the deficit; if it does not hold enough Dai, the documented system may use a debt auction that mints and sells MKR for Dai. This describes the MCD flow in the white paper, not necessarily every current Maker product or any other vault system.
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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. | 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 can initiate liquidation; auction participants bid on collateral. |
| What happens to collateral? | A liquidator receives collateral with a reserve-specific bonus for repaying debt. | Collateral is auctioned for Dai; surplus is returned if auction proceeds cover the obligations. |
| What if proceeds fall short? | The cited Aave sources do not establish a universal borrower-level shortfall rule; outcomes depend on the market and implementation. | The documented auction deficit becomes protocol debt, which the Maker Buffer covers; a debt auction may follow if the Buffer is insufficient. |
| Which settings can vary? | Liquidation thresholds and bonuses vary by reserve and market. | Liquidation ratios and penalties are set by governance for collateral types. |
Will you lose all your collateral or still owe money?
There is no single answer for every crypto vault. In Aave, a liquidator receives collateral in exchange for repaying debt, and the amount depends on the market’s rules and position. The cited Aave sources do not establish that every liquidation produces the same borrower-level shortfall outcome. In Maker’s documented MCD auction model, surplus collateral is returned if the auction covers the obligations; if it does not, the deficit becomes protocol debt rather than being described as a personal balance owed by the vault owner.
Do not assume a liquidation guarantees a particular sale price, that all collateral will be taken, or that all debt will be erased. Price changes, oracle inputs, accrued interest, transaction execution and protocol parameters all affect what happens.
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Can you prevent a liquidation?
Before a position becomes eligible, adding collateral or repaying debt can improve Aave’s health factor. Aave says repayment generally improves the factor more than supplying collateral. There is no single health factor that Aave describes as safe for every position: its official FAQ says safety depends on the volatility and correlation of collateral and borrow-asset prices. Monitoring the position and understanding the relevant market’s parameters matter because prices and interest can change the factor.
How Aave V4 differs in its documented design
Aave V4’s mutable repository documentation describes a design that replaces V3’s fixed close-factor logic with repayment calculated to restore a configurable target health factor. It also describes a variable liquidation bonus that rises as health factor falls, along with dust safeguards and protocol deficit accounting. This is documentation of a design; it should not be treated as the behavior of a live production market without confirming deployment status and configuration.
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