A liquidation threshold is a lending-protocol risk parameter used to determine when collateral no longer sufficiently supports a debt position. In collateralized DeFi lending, it often specifies the share of a collateral asset’s assessed value counted when testing liquidation eligibility.
Reading the threshold
In an Aave-style position with one collateral asset, an 80% threshold means liquidation-adjusted collateral value equals 80% of its assessed value. If collateral is worth $1,000 and debt is $800, the health factor is exactly 1. If collateral falls to $950 while debt remains unchanged, adjusted value is $760 and health factor is 0.95, below Aave’s liquidation boundary. This hypothetical example ignores interest and fees and uses no current market parameter.
With multiple collateral assets, their applicable thresholds must be weighted by value rather than treating every asset identically.
Distinguishing related parameters
A maximum borrowing loan-to-value ratio controls how much new debt can initially be taken and may be lower than the liquidation threshold. A liquidation bonus determines the liquidator’s incentive; a close factor limits how much debt can be repaid in a liquidation. These are different settings.
Crossing a threshold establishes eligibility under the protocol’s rules, not a guaranteed sale price. Oracle updates, market liquidity, governance changes and transaction execution affect the process and potential loss.