Liquidation Risk Calculator
Calculate Your Liquidation Risk
Understand your exposure to liquidation in DeFi collateralized loans. Enter your loan details to see when your position becomes under-collateralized and how much collateral you might lose.
When you borrow using crypto as collateral, you’re not dealing with a bank manager or a loan officer. You’re trusting code-smart contracts that monitor your position 24/7 and can wipe out your position in seconds if things go wrong. This is the liquidation process in collateralized loans on blockchain, and it’s nothing like traditional lending. No calls, no warnings, no extensions. Just math, market prices, and automated execution.
What Triggers a Liquidation in DeFi?
In traditional loans, missing a payment might get you a reminder. In DeFi, if your collateral drops in value and your loan becomes under-collateralized, the system doesn’t ask. It acts. The trigger is simple: your collateral ratio falls below the protocol’s liquidation threshold.
Most DeFi platforms set this threshold around 110%. That means if you deposit $1,000 in ETH as collateral to borrow $800 in USDC, your collateral ratio is 125% ($1,000 / $800). If ETH’s price drops 20%, your collateral is now worth $800. Your ratio drops to 100%-and the liquidation bot springs into action.
Some protocols, like Aave and Compound, use a slightly higher buffer-115% or even 120%-to give users a tiny bit of breathing room. But even then, a sudden market crash can erase that cushion in minutes. There’s no grace period built into the contract unless the protocol specifically adds one after a system pause.
How the Liquidation Actually Happens
Unlike banks that send repossession agents to take your car, DeFi liquidations are handled by automated bots run by third-party traders. These liquidators scan the blockchain for under-collateralized loans and submit transactions to seize collateral in exchange for repaying part of the debt.
Here’s the step-by-step:
- A borrower’s collateral value drops below the liquidation threshold.
- A liquidator detects the position and calls the protocol’s liquidation function.
- The smart contract automatically transfers a portion of the borrower’s collateral to the liquidator.
- The liquidator uses that collateral to pay off the borrower’s outstanding debt.
- The borrower keeps any remaining collateral after the debt is cleared.
The liquidator gets a reward-usually a 5% to 10% discount on the seized collateral. So if you had $1,000 in ETH and got liquidated, the liquidator might pay off $900 of your debt and take $950 worth of ETH as payment. That’s a $50 profit for them, and you’re left with $50 in ETH (or nothing, if your debt was higher).
Why do liquidators bother? Because the profit is instant, and the gas fees are low compared to the upside. But if the discount is too high-say, 30%-liquidators walk away. Why risk a $300 loss on a $1,000 position when the market might rebound? That’s why some protocols set liquidation penalties too high and end up with stuck bad debt.
Why DeFi Liquidations Are Riskier Than Traditional Ones
Traditional lenders have rules. They appraise property. They negotiate. They wait. They follow SBA SOPs or state foreclosure laws. In Florida, a bank can’t just take your business assets the moment you miss a payment. There’s paperwork, timelines, and legal recourse.
DeFi has none of that. No appeals. No mediation. No judge. The code doesn’t care if you lost your job, your wallet got hacked, or you were on a three-week hiking trip with no signal. If your collateral ratio dips below the line, you’re liquidated.
And it gets worse. Some protocols pause during extreme volatility-like during the Terra collapse in 2022. When they un-pause, they don’t reset your debt. They don’t recalculate your interest. They just resume liquidations from the exact moment the system froze. If you owed $10,000 when the pause hit, you now owe $10,800-because interest kept accruing in the background. And suddenly, your position is underwater again. No warning. No second chance.
How CLOs and Traditional Loans Compare
It’s worth stepping back to see how this fits into the bigger picture. Collateralized Loan Obligations (CLOs) are institutional products where banks bundle hundreds of corporate loans, slice them into tranches, and sell them to investors. When a borrower defaults, the CLO manager sells the underlying assets, distributes proceeds based on seniority, and follows strict credit enhancement rules.
Compare that to DeFi: one borrower, one smart contract, one trigger. No rating agencies. No credit scoring. No human oversight. CLOs have layers of protection-overcollateralization, credit triggers, waterfall payment structures. DeFi has one number: the collateral ratio.
Even SBA 7(a) loans, which are government-backed, have a multi-step liquidation process. Lenders must try to work out a repayment plan, conduct appraisals, file reports with the National Guaranty Purchase Center, and wait for approval before charging off the loan. It takes months. DeFi does it in minutes.
That speed is powerful-but dangerous. One bad price feed, one flash crash, and you lose everything you put up. There’s no safety net.
How to Avoid Being Liquidated
If you’re using collateralized loans on blockchain, your survival depends on three things: monitoring, buffer, and timing.
- Monitor your collateral ratio daily. Use tools like DeBank, Zerion, or your wallet’s built-in dashboard. Set up price alerts for your collateral asset. If ETH drops 10%, don’t wait for the 15% drop to act.
- Keep extra collateral on hand. Never borrow up to the max. If your protocol allows 75% LTV, aim for 50% or lower. That gives you room to weather volatility.
- Use stablecoins wisely. Borrowing USDC against ETH is common, but if ETH crashes, your debt doesn’t change. Your collateral does. That’s the risk. Borrowing against a stablecoin like DAI is even riskier-because if DAI depegs, you’re in trouble.
- Don’t use leverage without a plan. If you’re borrowing to buy more crypto, you’re doubling down on risk. One liquidation can wipe out your entire position-and your profits.
Some advanced users use automated tools like Reaper or Gelato to automatically top up collateral when prices dip. That’s not cheating-it’s risk management. The market doesn’t care if you’re “too careful.” It only cares if you’re still in the game.
The Bigger Picture: Why This Matters
DeFi liquidations aren’t just about losing crypto. They’re a stress test for the entire decentralized finance system. If too many users get liquidated in a crash, it creates cascading sell-offs. Liquidators dump seized collateral on the market, driving prices lower, triggering more liquidations. It’s a death spiral.
That’s why protocols are starting to add safeguards: grace periods after unpausing, dynamic liquidation thresholds based on volatility, and insurance pools to cover losses. But these are patches, not solutions. The core problem remains: automated systems can’t understand human hardship.
Traditional finance has rules, delays, and mercy. DeFi has speed, transparency, and finality. You can’t have both. If you choose DeFi, you’re choosing to play by machine rules. And machines don’t forgive.
What Happens After Liquidation?
You don’t get a second chance in most DeFi protocols. Once your position is liquidated, it’s gone. The smart contract deletes your loan record. Your collateral is transferred. Your debt is cleared. There’s no way to reverse it.
Some protocols let you re-borrow after a cooldown period, but your credit score doesn’t exist here. Your reputation is tied to your wallet. If you’ve been liquidated multiple times, other protocols might flag your address as high-risk-and refuse to lend to you.
And unlike SBA loans, where you might get a guaranty payout after liquidation, DeFi has no safety net. No government backs your position. No bank absorbs the loss. You lose it all.
What is the typical collateral ratio that triggers liquidation in DeFi?
Most DeFi protocols trigger liquidation when the collateral ratio falls below 110%. This means if you borrowed $1,000 worth of assets, you need at least $1,100 in collateral to stay safe. Some platforms use higher thresholds like 115% or 120% to reduce risk, but 110% is the most common standard.
Can you recover your assets after a liquidation?
No. Once a liquidation is executed by a smart contract, the transaction is final and cannot be reversed. The collateral is transferred to the liquidator, and your debt is cleared. There is no appeals process, no customer service, and no way to undo it. Prevention is the only strategy.
Do DeFi protocols charge fees for liquidation?
Yes. Liquidators receive a discount on the seized collateral, typically between 5% and 10%. This discount acts as their fee for executing the liquidation. Some protocols have experimented with higher fees (up to 30%), but those often discourage liquidators, leading to stuck bad debt. The 5-10% range is the industry standard for balance and efficiency.
How is DeFi liquidation different from SBA loan liquidation?
SBA loan liquidation is a slow, regulated process requiring appraisals, legal steps, and government oversight. Lenders must exhaust all collection efforts before charging off the loan. DeFi liquidation is instant, automated, and governed by code. No human intervention, no paperwork, no delays. The trade-off is speed versus mercy.
Can a market crash cause mass liquidations in DeFi?
Yes. During sharp price drops-like Bitcoin falling 40% in a day-thousands of leveraged positions get liquidated at once. This creates a feedback loop: liquidators sell seized collateral, driving prices lower, triggering even more liquidations. This is why DeFi protocols are now exploring volatility buffers and dynamic liquidation thresholds to prevent systemic crashes.
Are there any protections for borrowers in DeFi?
Very few. Some protocols offer insurance pools (like Nexus Mutual) or grace periods after system pauses, but these are optional and not guaranteed. The default assumption is that borrowers are responsible for monitoring their own positions. If you’re not watching your collateral ratio, you’re gambling.
Final Thought: Know the Rules Before You Play
Collateralized loans on blockchain aren’t loans-they’re margin trades with extra steps. You’re not borrowing money. You’re betting that your collateral won’t drop. If it does, the system doesn’t help you. It takes what you put up and moves on.
There’s no such thing as a safe DeFi loan. Only safer ones. And the only way to be safer is to understand the mechanics, respect the risks, and never borrow more than you can afford to lose. Because when the liquidation bot hits, there’s no second chance.
Matt Zara
Man, I remember when I first got liquidated on Aave. Thought I had a 20% buffer. ETH dropped 30% overnight. No warning. No mercy. Just a transaction hash that said 'you're done'. I learned the hard way: never borrow max. Always leave room for chaos.
Now I keep 50% LTV even if the protocol lets me go to 75%. It's not sexy, but it's the difference between sleeping and sweating bullets.
Also, set alerts. Like, real ones. Not just your wallet's lazy notification. Use DeBank or Zerion. If your collateral dips 10%, you've got time to act. After that? It's all bots and blockchain.