DeFi Liquidations: What They Are and How to Monitor Them

A DeFi liquidation is a forced partial repayment of your loan, carried out by a stranger, once your collateral no longer safely covers what you borrowed. It works the same way on Aave, on Compound and on every lending app where you borrow against coins you already own. Nothing about it is negotiable and nothing is reversible, which is why watching the position beats reacting to it.

What actually triggers one?

Each loan has a line it must stay above, shown as a health factor on Aave or a borrow limit elsewhere. Cross it and your position is open to anyone. It is the old margin call, with one difference: nobody phones you. Two things push you across. Your collateral falls in value, or your debt quietly grows as interest accrues. A loan opened at a comfortable level and forgotten for a year can arrive at the line with no price crash involved at all.

How to monitor your positions

• The app's own dashboard. Aave shows your health factor on the front page. Check it on a schedule, not on a hunch.
• A price alarm. Work out the collateral price that would put you at the line, then set an alert well above it on whatever exchange app you already have on your phone.
• Automation. Services such as DeFi Saver can repay part of a loan for you when the health factor hits a level you choose - useful if your position sits across time zones from your sleep.
• A portfolio tracker. Tools that read your wallet address and alert on position changes catch the loans you forgot you had.

What to do when the alert fires

There are exactly two moves: repay some of the debt, or add collateral. Both need gas, and gas gets expensive precisely when markets fall and everyone is doing the same thing. Keep a small amount of ETH and a little of the stablecoin you borrowed in the same wallet, reserved for this and nothing else. The people who get liquidated are rarely the ones who were wrong about the market. They are the ones who had the right idea and no spare funds in the right place at 3 a.m.

Set your personal alarm at a health factor of about 1.5 rather than 1.05 - the extra room buys you the minutes that matter. Then read how to avoid getting liquidated and what happens as your health factor falls.