Definition
A liquidation threshold is the collateral ratio or protocol parameter at which an overcollateralized borrowing position becomes eligible for liquidation.
How the threshold affects a borrow position
In lending protocols, each collateral asset can have a liquidation threshold set by governance or risk parameters. The protocol combines collateral values, their thresholds and outstanding debt into a health measure. On Aave, a health factor below one makes the position eligible for liquidation.
The threshold can be higher than the loan-to-value limit used to open a new borrow. That gap provides a buffer, but falling collateral prices, rising debt or parameter changes can reduce it.
The same words can describe different venue rules
A derivatives venue usually describes liquidation through maintenance margin and a liquidation price rather than a collateral liquidation threshold. Both concern forced risk reduction, but their formulas and account boundaries are different.
What it does not mean
A liquidation threshold is not the same as the maximum loan-to-value ratio, and it is not automatically the displayed liquidation price of a perpetual futures position.
Where this term fits
Questions about liquidation threshold
- Is liquidation threshold the same as loan-to-value?
- No. Loan-to-value limits new borrowing, while the liquidation threshold marks when an existing position can become eligible for liquidation.
- What can move a position closer to liquidation?
- Falling collateral value, rising debt and changes to collateral or risk parameters can reduce the safety buffer.
- Do all protocols calculate liquidation the same way?
- No. Each lending protocol or trading venue defines its own parameters, price inputs and liquidation process.
See these concepts in context
Review the Fensory MCP connection, tools and account controls.