# Liquidation

A liquidation occurs when a borrower’s health factor falls below 1, indicating that the value of their collateral no longer sufficiently covers their debt. This could happen due to a drop in the collateral value or an increase in the borrowed debt. The health factor represents the ratio of collateral to debt, and if it falls too low, the loan may be liquidated.

In a liquidation, up to 50% of a borrower’s debt is repaid, and this amount, along with a liquidation fee, is deducted from the borrower’s collateral. After liquidation, the amount repaid from the debt is covered by the collateral liquidation.

## How Much Is the Liquidation Penalty?

The liquidation penalty (or bonus for the liquidator) varies depending on the asset used as collateral. 

Example Scenarios:

• Example 1:

Bob deposits 10 BTC and borrows the equivalent of 5 BTC in USDT. If Bob’s health factor drops below 1, his loan is eligible for liquidation. A liquidator can repay 2.5 BTC worth of USDT (50% of the borrowed amount). In return, the liquidator receives 2.5 BTC plus a 5% bonus of 0.125 BTC, totaling 2.625 BTC for repaying the debt.

• Example 2:

Bob deposits 5 BTC and 4 BTC worth of ETH, borrowing 5 BTC worth of USDT. If Bob’s health factor drops below 1, his loan is eligible for liquidation. A liquidator can repay 2.5 BTC worth of USDT (50% of the borrowed amount). Since the liquidation bonus for BTC is 15% and ETH is 5%, the liquidator chooses to claim BTC. The liquidator receives 2.5 BTC plus a 15% bonus of 0.375 BTC, totaling 2.875 BTC for repaying the debt.

## How to Avoid Liquidation

To avoid liquidation, users should aim to keep their health factor high. Here are two ways to do this:

1. Deposit More Collateral: Adding more collateral to your position increases your health factor, lowering the risk of liquidation.
2. Repay Part of Your Loan: Making partial repayments increases your health factor more significantly than additional deposits. Regular repayments also help reduce the overall debt.<br>

To avoid liquidation entirely, keep your health factor above 2. This gives you a significant safety margin. Additionally, keep an eye on the price fluctuations of stablecoins like USDC, which may affect your health factor due to market conditions. For example, if USDC is priced at $0.95 instead of $1.00, it can cause your health factor to decrease, triggering liquidation risk.

## Can I Participate in the Liquidation Ecosystem?

Yes, liquidations are open to anyone who wishes to participate, but the competition can be fierce. Most liquidators develop sophisticated bots or tools to get ahead and claim liquidation bonuses quickly. If you have the right strategy and tools, you can profit from liquidating undercollateralized loans.

## Why Avalon?

Avalon’s DeFi lending protocol stands out by offering a highly secure, efficient, and scalable lending platform. With our isolated pools, deep liquidity, and multichain deployment, we provide the best conditions for both borrowers and lenders. Our innovative approach to risk management ensures that your assets are safe, while our liquidation process offers opportunities for liquidators to participate in the ecosystem.

Whether you’re borrowing BTC or BTC LSD tokens or looking to capitalize on lending opportunities, Avalon has the right solutions to meet your needs.

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