Liquidating a loan position based on bad health
Liquidations happen when a borrower’s Health Factor drops below 1 due to the value of their collateral not covering their loan/borrowed value. This happens when the collateral decreases in value or when the borrowed debt increases in value against the collateral.
The Collateral vs Loan value ratio is shown as the Health Factor. In a liquidation, a borrower’s debt is repaid and that value, plus a liquidation fee, is taken from the available collateral.
Liquidations are a necessary mechanism for maintaining platform health. Therefore they are incentivized with a liquidation bonus that grants the liquidator the user’s collateral at a discount relative to the market price at the point at which the liquidation occurs. Due to this discount, users should avoid allowing their accounts to become undercollateralized and subject to liquidation.
Further details on collateralization and liquidation can be found in the Protocol Parameters section of these docs.
In order to avoid the reduction of the user's Health Factor leading to liquidation, the user can repay the loan or deposit more assets in order to increase their Health Factor.