> For the complete documentation index, see [llms.txt](https://docs.tydro.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.tydro.com/ii.-core-concepts/liquidations-and-risk-management.md).
# Liquidations & Risk Management
How the Tydro Protocol operates to manage risk through an open market liquidation process
## Overview
Liquidation keeps every market solvent by closing positions that fall below their safety threshold. Tydro uses the Aave V3 permissionless liquidation model.
### Health Factor
Each borrow position has a health factor, which represents a position's collateral value relative to its debt and distance from liquidation. Positions with a Health Factor below 1 can be liquidated.
$$
\text{Health Factor} = \frac{\sum \left( \text{Collateral} \times \text{Liquidation Threshold} \right)}{\text{Total Debt}}
$$
### When liquidations occur
While the Health remains above 1, the position can not be liquidated. When it reaches 1 or below, the position becomes eligible for liquidation. A health factor drops for two reasons: collateral falls in value, or debt grows as interest accrues.
### How a liquidation runs
1. A position's health factor reaches 1 or below
2. A liquidator repays part of the outstanding debt on the position's behalf
3. In return, the liquidator receives an equal value of the position's collateral, plus the liquidation bonus
4. The repayment lowers the debt and lifts the health factor back above 1
Liquidation is permissionless. Anyone running a bot can participate to earn the liquidation bonus.
### Avoiding liquidation
Add collateral or repay debt to raise the position's health factor before it reaches the threshold. Borrow at a manageable LTV and monitor your positions actively in times of market stress.
### OTC loan liquidations
OTC loans have LT and LTV triggers negotiated and managed at the custodian level, and do not directly interact with the Tydro smart contracts for permissionless liquidations like other markets.
---
# Agent Instructions
This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com.
## Querying This Documentation
If you need additional information that is not directly available in this page, you can query the documentation by asking a question.
Perform an HTTP GET request on the following URL with the `ask` and `goal` query parameters:
```
GET https://docs.tydro.com/ii.-core-concepts/liquidations-and-risk-management.md?ask=&goal=
```
`ask` is the immediate question: it should be specific, self-contained, and written in natural language.
`goal` is what the user is ultimately trying to achieve, the reason they need the answer. Sharing it helps GitBook give you a better, more relevant answer. A goal is most helpful when it describes the outcome the user wants rather than restating the question. For example, with `ask=how do I create an API token`, a goal like `automate deployments from our CI pipeline` lets GitBook tailor the answer to that use case.
The response will contain a direct answer to the question and relevant excerpts and sources from the documentation.
Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.