Chris | Crypto Assessor

Animation Vs Geometry 🎥: alanthebecker

DeFi Basics 101: How Liquidations Work in Lending ever wondered how lending markets liquidate your position before it turns into bad debt? you deposit collateral, borrow against it, and everything’s fine… until your Rabby wallet stops showing your borrow position. liquidation is the reason lending markets don’t collapse. here’s how it actually works. you deposit $1,000 of ETH and borrow $700 USDC. your loan-to-value (LTV) is 70%. you’ve borrowed 70% of your collateral’s value. the protocol sets a liquidation threshold — say 85%. cross that line and your position becomes eligible for liquidation. now ETH drops 20%. your $1,000 collateral is now worth $800. remember? you still owe $700. new LTV = 700 / 800 = 87.5%. you crossed the threshold. congratulations. you’re getting liquidated. here’s what happens next: a liquidator — usually a bot scanning the chain 24/7 — steps in. it repays part of your debt and, in return, takes your collateral at a discount. example: the bot repays $350 of your debt and takes $370 worth of ETH. that $20 difference is the liquidation bonus — the incentive that makes liquidators show up. no bonus = no liquidators = system starts breaking. after liquidation: your debt is lower your LTV improves the protocol stays solvent you lose a chunk of collateral that’s the trade-off. circle of life. why liquidation exists without it, borrowers go underwater. if your $1,000 collateral drops to $500 while you still owe $700 — who covers the gap? the lender does. that’s bad debt. the protocol promised lenders safety… liquidation prevents that. it protects lenders. HEALTH FACTOR (what you should actually watch): most protocols don’t show LTV directly. they show a health factor: health factor = (collateral × liquidation threshold) / debt above 1 → safe at 1 → liquidation starts below 1 → you are cooked lower health factor = closer to the edge. if you’re not watching this number idk what to say... PARTIAL VS FULL LIQUIDATION: most protocols don’t wipe you instantly. they liquidate just enough to bring your position back to safety: slight breach → 20–50% of debt repaid severe crash → full liquidation possible depends on how far past the threshold you are and how fast things moved. THE LIQUIDATION ECONOMY: liquidators earn a bonus (usually 5–10%). this creates an entire economy of bots competing to be first. faster bot = more liquidations = more profit. mfs are running custom infra and MEV strategies just to be 1ms faster at taking your collateral. you’re the one paying for it. that bonus comes straight out of your bag. where things break?????? liquidation depends on one assumption: someone is willing and able to buy the collateral. with ETH or stablecoins → fine. bots fight for it. with illiquid tokens: everyone sells no buyers show up liquidators back off debt goes unpaid that’s how bad debt still happens — the exact thing liquidation was supposed to prevent. most of the time the system works. edge cases — thin liquidity, cascading liquidations, flash crashes — break it. DIFFERENT LIQUIDATION DESIGNS not all protocols do it the same way: 1. standard → bots repay debt, take discounted collateral, dump on DEX 2. auction-based → liquidators bid, reducing borrower penalty 3. tick-based → more gas-efficient, DEX-style mechanics same goal: repay debt before insolvency. what changes is who profits, how much you lose, and what happens when liquidity disappears. HOW NOT TO GET LIQUIDATED (read this twice) 1️⃣ keep LTV well below the threshold 2️⃣ monitor your health factor 3️⃣ set PRICE ALERTS!!!!!!!!!! if you made it this far, here’s the alpha. in Silo V3, we’re fundamentally changing how liquidation works in lending markets 👀 SILO THE RISK — SILO INTERN