A liquidation is a process that occurs when a borrower's loan risk goes beyond 100% due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other.
In M0:
The liquidator repays part or all of the outstanding loan amount, and the liquidator receives Liquidation Bonus. The liquidator can choose to receive the relevant amount of tToken instead of the underlying asset. When the liquidation is completed, the Loan Risk of the position is decreased to below 100%.
Liquidators can only close a certain amount of collateral defined by a close factor. Currently the close factor is 0.5. In other words, liquidators can only liquidate a maximum of 50% of the amount pending to be repaid in a position. The liquidation discount applies to this amount.
In M1:
When the Loan Risk of a debit order in M1 increases beyond 100%, the liquidator repays the entire outstanding amount to get the collateral at a discounted price. There is no LiquidationBonus in M1, but the liquidator is expected to receive a reward of approximately
*(1 -liquidationThreshold)CollateralValue.
loan risk=Outstandingdebtvalue/(assetValue*liquidationThreshold)

What's the liquidation threshold?

LiquidationThreshold is one of the factors that determine when an asset meets the liquidation condition. The substantial collateral value of the asset after completion of the charge is the asset value * LiquidationThreshold, which is the portion of the basis that the liquidator can obtain after paying the debt in lieu of the borrower.

How much is the liquidation bonus?

The liquidation bonus depends on the asset used as collateral. Mostly, it is 5%.
💡 The liquidator will receive the collateral and Bonus, while the remaining collateral will be retained for the borrower
Assuming the MaxLTV of ETH is 80%, the LiquidationThreshold is 90%, and the LiquidationBonus is 5%, then for a $100 ETH deposit, the maximum dollar value that can be borrowed is $80, and the substantive collateral value of ETH is $90 when LoanRisk=Debt Value/Substantial Collateral Value = 100%, at which point it can be liquidated;
  • Suppose liquidation occurs because the debt grows to $90, then the liquidator needs to help repay the Token corresponding to $90 and get $95 of ETH collateral, the remaining $5 will be reserved for the borrower.
  • Suppose the debt is still $80 and the material collateral value of ETH = DepositLiquidationThreshold falls to $80, then at this time the collateral still has $88.8, then the liquidator will get $80+$88.85%=$84.4 of ETH after repaying the corresponding Token corresponding to $80, and the remaining $4.36 of ETH will be reserved to the borrower.
💡 The liquidator may also liquidate only 50% of the debtor's collateral

How can I avoid getting liquidated?

To avoid liquidation you can lower your loan risk by depositing more collateral assets or repaying part of your loan. Also, it's important to monitor your loan risk and keep it low to avoid a liquidation.

Can I participate in the liquidations ecosystem?

Yes, liquidations are open to anyone, but there is a lot of competition. Normally liquidators develop their own solutions and bots are the first ones liquidating loans to get the liquidation bonus.