DeFi · 55 / 86 · 2 min

Lending and liquidation

Lending protocols let you deposit collateral and borrow against it. If the collateral's price falls, the protocol can sell it. That sale is a liquidation. It is automatic, and it is not on your side.

A worked case

A person borrows a stablecoin against a volatile coin and spends the stablecoin. The collateral falls. The protocol sells the collateral. They still owe nothing further in this simple case, but the coin they meant to keep is gone. The interest was the small number. The liquidation was the large one.

The borrow

You might borrow a stablecoin against a volatile coin. You pay interest. The collateral has to stay above a line. The line is their rule, not your hope.

When the price moves

A fast drop can liquidate you before you wake up. A penalty is added. You do not get to negotiate.

Borrowed money makes the same move hurt more. This course does not teach you how to lever up. It tells you the machine will sell your collateral.

The line was theirs

Lending protocols such as Aave and Compound let you deposit collateral and borrow against it. If the collateral's price falls through a ratio they set, a liquidator repays your debt and takes the collateral at a discount. It is automatic. It does not ring you. In the May 2022 Terra collapse and the June 2022 Celsius freeze, cascading prices pushed a lot of this machinery at once. People who had borrowed a stablecoin to spend, and kept the volatile coin as collateral, were sold out of the coin they had meant to hold. The interest rate had been the small number on the screen.

Celsius was the centralised cousin: they did the lending behind an app and then could not return the deposits. The on-chain version at least does the sale in public. Public is not the same as kind. The ratio is their rule. Your hope that the price comes back is not an input to the contract.

If you cannot name the liquidation price in dollars, you do not know the loan. The protocol does, and it will use its number.

Read it yourself

• Aave
• Celsius Network, the custodial version of the same bet

These links are the record. They are not a recommendation, and they are not instructions. A news story or a court paper can still be wrong about a detail. The check does not change because a famous name is in the story.

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Open a question. The line is about this topic. It is not a verdict that anything is safe.

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