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How Does the Liquidation Mechanism Work in a DeFi Lending Protocol?

Smart contracts automatically seize and sell collateral when its value drops below a set ratio to ensure protocol solvency.
Greeks.Live17.11.25

How Does the Liquidation Mechanism Work in a DeFi Lending Protocol?

A DeFi lending protocol uses smart contracts to constantly monitor the collateralization ratio of a loan. If the value of the collateral falls below a pre-defined liquidation threshold due to market price movement, the smart contract automatically allows liquidators to repay a portion of the debt and seize the collateral at a discount.

This process ensures the protocol remains solvent.

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