A liquidation is a process that is triggered when a borrower's health factor goes below 1 due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other.
- As a lender, liquidation works essentially like a protection mechanism. The liquidation threshold protects lenders from extreme price drops, which could cause under-collateralization followed by liquidation.
- As a borrower, if your collateral value falls closer to your debt value or is unable to support your debt value, after the Borrower Grace Period the protocol will allow someone else to repay your debt in exchange for the collateralized NFT.
In a liquidation event, the borrower permanently loses ownership of their NFT. To avoid liquidation, you can raise your health factor by depositing more collateral assets or repaying part of your loan. Due to the impact of LTV, repayments increase your health factor more than deposits.
Depositing more collateral is a feature under development.