Liquidation
The forced sale of collateral when a borrower's collateral value drops below the required minimum ratio.
Liquidation is the DeFi equivalent of a margin call. If you borrowed 1,000 USDC against ETH collateral and ETH's price drops enough, the protocol automatically sells your ETH to repay the loan. You lose a portion of your collateral plus a liquidation penalty (typically 5-15%).
To avoid liquidation, you can deposit more collateral or repay part of the loan. Most protocols show your "health factor" or liquidation price so you can monitor your risk.
As a USDC depositor (lender), liquidations don't directly affect you. They actually help, because liquidation penalties generate additional yield for depositors. But as a borrower, liquidation risk is the primary thing to manage.
Related Terms
Collateral
Assets pledged as security for a loan. In DeFi, you deposit crypto collateral to borrow other assets.
Lending Protocol
A DeFi application that lets users lend crypto to earn interest and borrow crypto against collateral.
DeFi (Decentralized Finance)
Financial services built on blockchain smart contracts that operate without traditional intermediaries like banks.
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This definition is provided for educational purposes. USDC.org is an independent resource and is not affiliated with Circle Internet Financial.