Liquidation β a controlled number, not a surprise
Imagine you have a house and a loan. If you stop paying β the bank can take your house. DeFiDeFiDecentralized Finance β financial services without intermediaries, operating through smart contracts.Read the lesson β works the same way, just much faster.
Liquidation is the moment a smart contract automatically sells your collateral (SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β or ETH) because your debt has become too large compared to it. The key thing you'll take from this lesson: it happens at one specific price, which you know in advance.
A simple analogy
Imagine you gave a friend your bike as collateral for a 50 EUR loan. If the bike's value dropped to 55 EUR β your friend would sell the bike to get their money back. Without asking you. That's liquidation.
When does liquidation happen?
When your LTV (loan-to-value ratio; debt/collateral) exceeds 83% β the smart contract (self-executing program code) sells your assets.
The smart contract runs on code β not mood, not negotiation. That works in your favor: the rules are known in advance and identical for everyone. You know the exact threshold (83% LTVLTVLoan-to-Value β the ratio of debt to collateral value. LTV 30% is considered safe. LTV 83%+ triggers liquidation.Read the lesson β) and the exact price at which it will be reached β so you can always choose to stand a safe distance from it.
The threshold is known β so it's manageable
The liquidation rule is fixed: LTVLTVLoan-to-Value β the ratio of debt to collateral value. LTV 30% is considered safe. LTV 83%+ triggers liquidation.Read the lesson β above 83%. Because you know the threshold in advance, you also know how much room you have before it. In practice you keep LTVLTVLoan-to-Value β the ratio of debt to collateral value. LTV 30% is considered safe. LTV 83%+ triggers liquidation.Read the lesson β well below that (30β45%), so a wide buffer stays between you and the limit β plenty of room to react.
The liquidation price formula
Liquidation price is the SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β price at which your LTVLTVLoan-to-Value β the ratio of debt to collateral value. LTV 30% is considered safe. LTV 83%+ triggers liquidation.Read the lesson β reaches 83%.
Formula
Liquidation price = (Debt Γ 1.05) / (SOL amount Γ 0.90 Γ 0.83)
Calculating with our example
- SOL amount: 126 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β
- Debt: 4,704 USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies.Read the lesson β
- Current price: $88
Liquidation price = (4,704 Γ 1.05) / (126 Γ 0.90 Γ 0.83)
= 4,939.20 / 94.12
β $52.5
What this means: if the SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β price drops from $88 to $52.50 (that's β40%), your position gets liquidated.
How liquidation happens, step by step
SOL price drops
A sharp decline hits the market. SOL reaches $52. Your LTV crosses 83%.
Bots spot the opportunity
Specialized programs (bots) constantly scan the blockchain looking for positions with an LTV that's too high. They earn a reward for executing the liquidation.
The smart contract sells your SOL
A bot submits the command. The smart contract sells part or all of your SOL to cover the debt. The sale happens at the market price.
A penalty is added
On top of covering the debt, a liquidation penalty is deducted from the assets being sold. Its size depends on the platform and the asset. It's an extra loss for you.
Aave [ETH]: ~5% (E-Mode ~1%). Kamino [SOL] liquidates in increments (soft liquidation) with a much lower penalty β from ~1% down to 0.1%. Check your platform's penalty BEFORE you borrow.
What's left is returned
If anything remains after all that β it's returned to you. But often what's left is very small.
How much can you lose? A worked example
Before liquidation
| Collateral | 126 SOL Γ $88 = $11,088 |
| Debt | 4,704 USDC |
| Room until danger | β40% |
At the moment of liquidation (SOL = $52)
| Collateral value | 126 SOL Γ $52 = $6,552 |
| Debt (weighted) | $4,939 |
| LTV | 83% β LIQUIDATION! |
After liquidation
| Value | |
|---|---|
| Sold to cover the debt (4,704 USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies.Read the lesson β) | ~90 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β |
| Penalty (~5% of the debt covered) | $235 (~5 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β) |
| SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β remaining | ~31 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β |
| Remaining value | 31 Γ $52 = $1,612 |
| Your equity (collateral β debt) | before (at $88): $6,384 β after: $1,612 |
Why it's worth avoiding liquidation
This example shows why prevention pays off: your equity of $6,384 would shrink to ~$1,612. Most of that gap is driven by the price drop itself β liquidation adds a ~$235 penalty on top and closes the position right at the bottom, so you no longer participate in the later recovery. That's exactly why we keep LTVLTVLoan-to-Value β the ratio of debt to collateral value. LTV 30% is considered safe. LTV 83%+ triggers liquidation.Read the lesson β low and have a plan. Knowing the liquidation price, you manage your buffer on purpose.
What determines how fast liquidation happens?
| What's happening | Fast/painful | Slow/gentler |
|---|---|---|
| Speed of the price drop | Sudden crash within minutes | Slow decline over a week |
| Network load | Congested (fees spike temporarily) | Normal |
| How many bots are watching | Many β liquidates fast | Few β you may have time to react |
| Your LTVLTVLoan-to-Value β the ratio of debt to collateral value. LTV 30% is considered safe. LTV 83%+ triggers liquidation.Read the lesson β buffer | Small (55%+) β immediate | Large (30%) β you have time |
SOL On SolanaSolanaA fast blockchain (under 1s, gas under $0.01). Home to the Kamino, Orca and Meteora ecosystem.Read the lesson β, liquidations happen within seconds (blocks every ~0.4s).
ETH On EthereumEthereumA blockchain with smart contracts. We use Aave (lending) and Uniswap (LP) on it.Read the lesson β, it can take a few minutes β and during a crisis, network fees spike temporarily because everyone is acting at once.
How to avoid liquidation β a 4-level plan
Have a plan IN ADVANCE
Never wait until things get bad. Have a plan ready for every situation:
Level 1 β LTV > 45% (Warning)
- Start checking every few hours
- Have USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies.Read the lesson β ready to repay debt
Level 2 β LTV > 55% (Danger)
- Repay part of the debt (20β30%)
- Or add more SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β/ETH as collateral
Level 3 β LTV > 65% (Critical)
- Urgently repay debt from every available source
- Close other positions and use the funds for debt repayment
Level 4 β LTV > 68% (Emergency) β this is a DELIBERATELY early trigger, not the technical one: KaminoKaminoSolana lending protocol. In our strategy: SOL collateral to a USDC loan.Read the lesson β liquidates at 83%. You act sooner so you still have time.
- Repay the ENTIRE debt. This is no longer optimization β it's damage control.
Our strategy's protection measures
Options protection (insurance)
DeribitThe LP position as a helper
Orca- LPLPLiquidity Provider β deposits tokens into a pool and earns a share of trading fees.Read the lesson β position in the range: $64β$88
- As the SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β price falls, the LPLPLiquidity Provider β deposits tokens into a pool and earns a share of trading fees.Read the lesson β "buys" SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β with your USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies.Read the lesson β
- That SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β can be added to your collateral
Action plan by scenario
| SOL price change | What to do |
|---|---|
| β20% ($70) | Sell the options, close the LPLPLiquidity Provider β deposits tokens into a pool and earns a share of trading fees.Read the lesson β, start over |
| β40% ($52.50) | DANGER β you should have already acted before this point |
| +15β20% | RollRollRolling an option β closing the old one and opening a new one with a later expiry.Read the lesson β the insurance upward |
| +100% ($176) | SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β gets sold through the option β a good outcome! |
LTV table β how it shifts with the price
| SOL price | Change | Collateral value weighted (Γ0.90) | LTV (weighted) | Status |
|---|---|---|---|---|
| $120 | +36% | $13,608 | 36.3% | Safe |
| $100 | +14% | $11,340 | 43.6% | Watch |
| $88 | 0% | $9,979 | 49.5% | Safe |
| $80 | β9% | $9,072 | 54.4% | Watch |
| $70 | β20% | $7,938 | 62.2% | Warning |
| $65 | β26% | $7,371 | 67.0% | Danger |
| $61 | β31% | $6,917 | 71.4% | Emergency β but still not liquidation |
| $52 | β41% | $5,897 | 83.8% | LIQUIDATION |
Glossary
| Term | What it means in plain terms |
|---|---|
| Liquidation | The system automatically sells your assets because the debt is too large |
| Liquidation price | The SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β price at which liquidation begins |
| Liquidation penalty | An extra fee (depends on the platform: ~0.1β10%) you lose during liquidation |
| Liquidator | The bot that executes liquidations and earns a reward |
| Crisis plan | A pre-prepared action plan for every LTVLTVLoan-to-Value β the ratio of debt to collateral value. LTV 30% is considered safe. LTV 83%+ triggers liquidation.Read the lesson β zone |
| Buffer | How much "cushion" you have left before liquidation |
Summary
- LiquidationLiquidationWhen LTV exceeds the threshold and the protocol automatically sells your collateral to cover the debt.Read the lesson β happens automatically when LTV > 83% β following a fixed, known-in-advance rule.
- LiquidationLiquidationWhen LTV exceeds the threshold and the protocol automatically sells your collateral to cover the debt.Read the lesson β price:
(Debt Γ 1.05) / (Amount Γ 0.90 Γ 0.83)β you calculate it BEFORE you borrow. - The penalty depends on the platform (from ~0.1% in KaminoKaminoSolana lending protocol. In our strategy: SOL collateral to a USDC loan.Read the lesson β's soft liquidation up to ~10%) β so it's worth never touching the threshold.
- With 126 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson β and $4,704 debt β liquidation sits at $52.50 (β40%).
- The main tool: prevention. Have a plan for every level.
- 30% LTV = the largest safety buffer you control yourself.
The liquidation price is the single most important number you need to know BEFORE you borrow. This task takes about 10 minutes, and you'll learn to calculate it yourself.
This whole task is just calculations on paper or in a calculator. No real borrowing, no wallet connection.
This is learning, not investing β use only small amounts you treat as tuition.
You just calculated your own liquidation price and a 4-level plan β that's how people who use DeFi for years, not days, operate.