Liquidation Risk

A position that falls below its liquidation threshold can lose collateral. This page describes how that happens and what can help prevent it

What liquidation costs

When the health factor reaches 1 or below, a liquidator repays part of the debt and takes an equal value of collateral, plus the liquidation bonus. The bonus is a real cost to the borrower. The borrowed assets are kept, but the collateral lost is worth more than the debt that was repaid. See Liquidations.

Liquidation is automatic and permissionless. It happens without notice and without the borrower's involvement the moment a position becomes eligible.

Acting in time may not be possible

Avoiding liquidation means adding collateral or repaying debt before the health factor reaches the threshold. A fast market may not leave the chance. Prices can move faster than a borrower can react, transactions can be delayed when the network is congested, and a position can cross the threshold while the borrower is still preparing to act.

Tydro runs on Ink. If the network or its sequencer is degraded or unavailable, a transaction to protect a position may not go through, or the transaction may land after another transaction with a higher priority fee within a given flashblock while prices continue to move and liquidation occurs.

Tydro Governance can implement a 2 hour liquidation grace period in extreme circumstances. This feature has only been used once in a precautionary measure after migrating to Chainlink oracles in May 2025.

Liquidation may not clear the debt

In extreme volatility, collateral can fall below the value of the debt before a position can be fully liquidated. The position can then be left with bad debt that liquidation does not cover. In the event of bad debt, losses may be shared amongst lenders or tranche holders.