Liquidation
Liquidation is a core part of how Euler keeps the protocol safe for everyone. If you're borrowing or using leverage, understanding liquidation is essential—not just to avoid it, but to manage your risk and make smart decisions.
What is Liquidation and Why Does it Matter?
Liquidation is the process that protects the protocol and its users when a position becomes too risky. If the value of your collateral drops, or the value of your borrowed asset rises, your position can become undercollateralized. When this happens, the protocol allows others (liquidators) to step in, repay some or all of your debt, and claim a portion of your collateral at a discount. This mechanism ensures that lenders remain protected and the protocol stays solvent.
How Liquidation Works on Euler
Every borrow or multiply position on Euler is tracked by a health score. This score is a quick way to see how safe your position is: the higher, the better. If your health score drops to 1 or below, your position becomes eligible for liquidation. This can happen for a few reasons—maybe the market moved against you, your collateral lost value, your borrowed asset gained value, or interest accrued and pushed you over the edge.
When a position is eligible, anyone can act as a liquidator. They repay part (or all) of your outstanding debt and, in return, receive some of your collateral at a discount. The protocol calculates exactly how much collateral is seized, based on the liquidation discount and the amount of debt repaid. After liquidation, any remaining collateral stays in your position, and your debt is reduced by the amount the liquidator repaid. If your position is still above the liquidation threshold, you're safe again. If not, it can be liquidated further until it's healthy or all collateral is gone.
The process is handled automatically by the protocol's smart contracts, with the Ethereum Vault Connector (EVC) ensuring that only eligible positions can be liquidated and that all transfers are handled securely.
What Happens After Liquidation?
If your position is liquidated, you don't lose everything. Only enough collateral is taken to cover the debt repaid by the liquidator (plus the discount). Any leftover collateral remains in your account. You can continue to use your position, add more collateral, or repay debt to improve your health score and avoid further liquidations.
How to Avoid Liquidation
Figure 1: Snippet of a user's position displaying its health
The best way to avoid liquidation is to keep your health score well above 1. Regularly check your positions in the Portfolio section of the app. If your health score starts to drop, consider adding more collateral or repaying some of your debt. Maintaining a healthy buffer between your current LTV and the liquidation threshold gives you more room to weather market swings.
Diversifying your collateral, using less volatile assets, and staying informed about market conditions can also help reduce your risk. Remember, interest rates can change, and so can the value of your assets—so keep an eye on your positions and act early if things start to look risky.
If you want extra peace of mind, set up notifications or use third-party tools to alert you when your health score drops below a certain level. And always make sure you understand the risks before taking on leverage or borrowing against your assets.
How is the Liquidation Discount Calculated?
When a position on Euler becomes eligible for liquidation, liquidators are incentivized to act by being able to purchase collateral at a discount. This "liquidation discount" is not a fixed value—it scales with how unhealthy the position is.
The deeper a position falls below the liquidation threshold (i.e., the lower its health score drops below 1), the larger the discount a liquidator receives. This means that if a position is only slightly in violation, the discount is small, but if it's deeply undercollateralized, the discount increases—up to a maximum set by the vault's configuration.
This system is known as a "reverse Dutch auction." It ensures that liquidations are fair: positions that are only slightly unhealthy aren't penalized excessively, while those that are riskier offer a greater incentive for liquidators to step in quickly.
For those interested in the technical details, the discount is calculated based on how far the account's health score has fallen below 1, and the vault's maximum liquidation discount setting. This approach helps protect both borrowers and the protocol, ensuring liquidations are efficient and fair.
Want to Be a Liquidator?
Liquidation isn't just a risk—it's also an opportunity. Anyone can act as a liquidator on Euler. If you spot a position that's eligible, you can repay its debt and claim collateral at a discount. This helps keep the protocol healthy and can be profitable if you act quickly and manage your own risks. For those interested in automated liquidation, Euler provides an open-source liquidation bot (liquidation-bot-v2) that can help monitor and execute liquidations efficiently.
Liquidation is a fundamental part of how Euler works. By understanding it, you can better protect your positions, avoid unnecessary losses, and even participate in keeping the protocol safe for everyone.