Liquidation is when a loan or leveraged position is closed automatically because the CollateralCollateralAn asset pledged as security for a loan. In DeFi, the collateral usually has to be worth more than the loan. or margin no longer covers the debt. You have no say over the timing. What is lost doesn't come back, even if the price recovers shortly afterwards.
In lending services
On DeFi lending services such as Aave, liquidation starts when the loan's health factorHealth factorA number that shows how well the collateral covers a DeFi loan. If it falls below 1, part of the collateral can be sold to repay the debt. falls below 1. Anyone can then repay part of the debt and receive part of the collateral at a discount in return. That discount, the liquidation bonus, rewards whoever closes the position, but for you it works like a penalty.
On Aave, up to half of the debt can usually be repaid in one go. If the position is in very poor shape, or the amounts are small, all of it can be. Nobody calls you first. The smart contract follows its rules as soon as the conditions are met.
In leveraged trading
When you trade with LeverageLeverageTrading with borrowed money, which multiplies both gains and losses and can wipe out your whole stake in a short time., for example with perpetual futuresPerpetual futures (perps)A derivative with no expiry date that tracks the price of a crypto. Regular payments keep it close to the market price, and it allows leverage., you put up margin. Once losses have eaten into the margin down to a set minimum, the maintenance margin, the exchange closes the position. By then most or all of the margin is gone. With high leverage, only a small price move is needed.
The price at which this happens is called the liquidation priceLiquidation priceThe price of a crypto at which a loan or leveraged position is closed automatically. The closer it is to the current price, the higher the risk.. Liquidations can also deepen a price fall: automatic selling pushes the price down, which triggers even more liquidations.
Everything in Myntkaup Learn is written and regularly reviewed by the Myntkaup editorial team. It is for education and is not investment advice. Editorial policy. Updated 18 October 2026.