What is liquidation risk?

Liquidation risk is the chance that a leveraged or borrowed position gets force-closed because your collateral has fallen below the minimum the protocol requires. It applies any time you borrow against your crypto or trade with leverage (like perpetual futures). If the value of your collateral drops too far relative to what you owe, the protocol automatically sells your collateral to repay the debt, often with a penalty, to protect itself from loss.

How liquidation works

• You post collateral and either borrow against it or open a leveraged position.
• The protocol tracks a health factor (or margin ratio): roughly, your collateral value versus your debt.
• Each position has a liquidation price: the level at which your health factor hits the threshold.
• If the market reaches that price, your position is liquidated, usually with a fee on top of the loss.

The more leverage you use, the closer your liquidation price sits to the current price, so smaller moves can wipe out the position.

How to manage it

• Use less leverage: lower leverage means more room before liquidation.
• Keep a buffer: borrow well under the maximum so a normal dip doesn't trigger a liquidation.
• Monitor the position: watch your health factor, especially in volatile markets.
• Add collateral or repay before the price reaches your liquidation level.
• Set alerts so you're warned before it's urgent.

This is educational information, not financial advice. Leverage can lead to rapid and total loss of the funds in a position.