LiquidationOn-chainRiskCollateral
What is liquidation in crypto? One mechanism, two venues
Liquidation is the forced sale of collateral that no longer covers a debt. Exchange margin and Aave loans side by side, from the venues' own pages.
By Staff, Lend Ledger
What is liquidation in crypto? It is the forced sale or close-out of a borrower’s collateral once that collateral no longer covers what was borrowed by the margin the lender requires. It shows up in two settings: an exchange closing a leveraged margin or futures position, and a lending protocol or lender selling the collateral behind a loan.
The two get written about as if they were different subjects. They are the same mechanism. A leveraged trade is a loan from the exchange, secured by the trader’s deposit; a crypto loan is a loan from a protocol or a company, secured by posted coins. In both, a price moves, the cushion between collateral and debt shrinks, and at a published line someone other than the borrower acts. What differs is where the line sits, who crosses it, and what the borrower loses.
This is an evergreen explainer: the mechanism does not change with the market, though each venue’s parameters can. Every rule below is pinned to the page it came from. This desk read Aave’s help-centre page on health factor and liquidations, Aave’s v4 developer documentation on liquidations, and Kraken Pro’s margin-call and liquidation page on 15 October 2026.
What is liquidation in crypto, on an exchange and on a loan?
| Venue | What is borrowed | Trigger | Who executes | What the borrower loses |
|---|---|---|---|---|
| Exchange margin (Kraken Pro, per its own page) | Funds from the exchange to hold a leveraged position | Equity drops below maintenance margin; a margin call comes first | The exchange’s liquidation engine, if the trader neither adds collateral nor reduces exposure | The position is closed; remaining collateral is returned; the page warns losses can exceed the initial investment |
| Aave, help-centre rule | Assets borrowed from a pool against supplied collateral | Health factor below 1 | Any network participant | Up to 50% of the debt is repaid against collateral plus a liquidation bonus; up to 100% at a health factor of 0.95 or below |
| Aave, v4 documentation | The same | Health factor below 1.0 | A liquidator choosing which debt to repay and which collateral to take | Collateral handed over as a bonus set by a Dutch auction: the lower the health factor, the higher the bonus |
| Custodial bitcoin lender | Cash or stablecoins from a company | Loan-to-value crosses the level in the agreement | The lender | Collateral sold, in part or in full, as the agreement allows |
The bottom row is the one this site covers most. The levels differ by lender and are set out in our ladder of custodial LTV triggers.
How does exchange margin liquidation work?
Kraken Pro’s page describes three stages. Before opening, the order form shows the liquidation price, the maintenance margin threshold and the projected margin level. While the position is open, margin level and P&L update live. If equity drops below maintenance, a margin call triggers in the interface; the trader can add collateral or reduce exposure, and if no action is taken, “the liquidation engine closes positions” and returns what collateral is left.
The page prints no numeric margin-level threshold in the text this desk read, so none is given here. Its risk notice is the line to keep: a trader may lose all or more than the initial investment, beyond the collateral deposited.
How does a crypto loan get liquidated on Aave?
Aave’s help centre defines the health factor as total collateral value multiplied by the weighted average liquidation threshold, divided by total borrow value. Below 1, the position can be liquidated. The threshold for each collateral asset is set by Aave Governance.
Its own example: $10,000 of ETH at an 80% liquidation threshold, with $6,000 of GHO borrowed, gives a health factor of 1.333. This desk’s arithmetic on that example, assuming the debt’s value holds: the factor reaches 1 when the ETH is worth $7,500, a 25% fall.
Once eligible, the help centre says up to 50% of total debt can be liquidated while the health factor is above 0.95 and both collateral and debt are at least $2,000 each; at 0.95 or below, or under $2,000 on either side, up to 100%. A partial liquidation must leave at least $1,000 of both, or the position is cleared. The liquidator repays debt for the borrower and takes equivalent collateral plus a liquidation bonus. The page states no bonus percentage in the text read, and says there is no universally safe health factor.
Aave’s v4 documentation describes the bonus differently: a Dutch auction in which lower health factors pay higher bonuses, and full liquidation of a reserve’s debt if under $1,000 would remain. The help centre’s liquidation text, as read, does not say which protocol version its figures describe. Do not assume one page’s rule describes the other’s market.
Who liquidates a crypto loan, and why it matters
On an exchange, the venue liquidates. On Aave, the help centre says liquidations are permissionless: anyone may act on an eligible position, and the work is competitive, often done by custom-coded bots. On a custodial loan, the lender does it under its own agreement, and the margin-call window it promises can be overtaken by the price. For how far that distance runs in practice, see our assessment of over-collateralised on-chain lending.
Frequently asked questions
What does liquidation mean and how to avoid it?
It means collateral is sold or a position is closed because it no longer covers the debt behind it. The venues’ own pages name the same two defences: add collateral, or reduce the debt. Kraken Pro’s page lists adding collateral or reducing exposure; Aave’s help centre lists supplying more collateral or repaying part of the borrow. Borrowing less at the start leaves more distance to the trigger.
What does it mean to get liquidated in bitcoin?
It means bitcoin posted as collateral, or a leveraged bitcoin position, was closed out because its value fell too far against the debt. On an exchange that is a margin or futures position closed by the liquidation engine. On a bitcoin-backed loan it is the lender selling collateral once the loan-to-value ratio crosses the level in the agreement, which differs by lender.
What is DeFi liquidation?
It is liquidation run by a smart-contract protocol rather than a company. On Aave, a borrow position whose health factor falls below 1 becomes eligible, and Aave’s help centre says any network participant may then repay some or all of the debt and take the borrower’s collateral in exchange, plus a liquidation bonus. Nobody at a desk decides; liquidators compete to be first.
Nothing above describes Kraken, Aave or any lender as regulated, licensed or authorised anywhere; no register was read for this piece. Every threshold quoted is the venue’s own published wording as read on 15 October 2026, and governance votes and loan agreements override it. Borrowing against crypto, on an exchange or a protocol, carries a high risk of loss, up to the whole of the collateral and on margin beyond it, and nothing here is financial advice.