How Much Is the Liquidation Penalty?

The liquidation penalty is the extra slice of collateral you hand over when a lending app closes part of your loan for you. On Aave it is usually around 5% of the debt repaid when your collateral is a major asset such as ETH, and more - often 7.5% to 10% - when it is a smaller, jumpier token. The figure is set separately for every collateral asset, and it is printed on that asset's page in the app before you borrow a cent.

Where does the penalty actually go?

Nobody at Aave presses a button. The protocol offers the penalty as a reward, called a liquidation bonus, to whoever repays your debt first - in practice a bot that watches every position on the network. Most of that bonus is the bot's profit, and on Aave a small slice is kept by the protocol's own treasury. Think of a pawnshop that keeps a cut when you never come back for the watch: the cut is the reason anyone bothers to run the shop.

Why is it bigger on some coins than others?

The penalty has one job: to make clearing your loan worth the gas fee and the price risk. A liquidator who seizes ETH can sell it in seconds at a known price. One holding a thin, volatile token may move the market just getting out, so the reward has to be larger to tempt anyone. That is why a 5% penalty on ETH collateral and a 10% penalty on an obscure token sit side by side in the same app.

What does it cost in real numbers?

Say you post 10,000 dollars of ETH and borrow 6,000 dollars of USDC. Prices fall, your health factor slips below 1, and a liquidator repays half the debt - 3,000 dollars. At a 5% penalty they take 3,150 dollars of your ETH. The 150 dollars is the penalty. That sounds survivable, and often it is. It stops being small when the same loan is hit twice in one falling day, or when your health factor drops far enough that the protocol allows the entire debt to be repaid at once instead of half.

Before you borrow, look up the penalty on the exact collateral you are posting and add it to your worst case - it is the number most people skip. Then make sure you know what counts as a good health factor and the habits that keep you away from the liquidation line in the first place.