Aave liquidation reduces eligible debt in exchange for collateral
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Aave liquidation allows a liquidator to repay an eligible borrower's debt in exchange for collateral. A health factor below 1 opens the position to liquidation, subject to the market's execution rules. The transaction reduces debt and removes collateral, including the amount that funds the liquidation bonus. The remaining balances determine whether the account still faces liquidation, needs an adjustment, or has no borrowing obligation left.
Collateral, debt, and oracle prices at the threshold
The health factor connects collateral eligibility, asset valuations, and outstanding debt in the same lending position. In V3, it equals total collateral value multiplied by the weighted average liquidation threshold, divided by total debt value. Each eligible collateral asset contributes according to its value and applicable threshold. Debt includes accrued borrowing interest, so the original loan amount alone cannot describe the position.
Loan-to-value limits govern borrowing capacity, while liquidation thresholds govern the collateral backing required for outstanding debt. These parameters serve different purposes. Efficiency Mode can change the applicable collateral parameters, so an ordinary reserve threshold may not describe that account. The protocol uses its configured oracle prices to value assets in a common reference currency. A price displayed elsewhere does not necessarily match the input that the liquidation calculation uses.
Why can the health factor fall without a new loan?
The health factor can fall because collateral loses value, borrowed assets become more expensive, or interest increases the outstanding obligation without another borrowing transaction.
A stable collateral price therefore does not establish a stable position. If the borrowed asset appreciates against the collateral, repaying the same token balance represents a larger obligation. Changes to applicable collateral parameters can also affect health. In V4, positions store references to configurations for collateral factors, maximum liquidation bonuses, and liquidation fees. Defined actions refresh those references, and governance can also modify the referenced configurations. A reserve's latest displayed settings and the settings attached to an existing position can consequently differ.
The threshold concerns the account's calculated state. Crossing it does not require the borrower to open an interface or acknowledge a warning.
Repayment limits across protocol versions
The close factor limits how much debt a liquidator can repay in a V3 transaction. Implementations with the V3.3 liquidation changes apply the default limit across the position's total debt value. Deeper deterioration or small balances in the selected reserves can permit full repayment of the selected debt. The available collateral can further restrict the amount that the transaction covers.
Implementations with the V3.3 liquidation changes also have rules against leaving economically insignificant balances, often called dust. A partial liquidation fails if either selected reserve's remaining balance falls below the minimum while both debt and collateral remain nonzero. Clearing the selected debt or exhausting the selected collateral can produce a different permitted outcome. A general statement that liquidation always removes half the account misses these conditions and confuses debt repayment with collateral removal.
V4 uses a different liquidation design, including a target health factor that normally limits repayment, with exceptions to avoid leaving dust and a bonus that varies with account health. A V3 close-factor estimate therefore does not transfer directly to a V4 position. The position's protocol version and applicable configuration determine the relevant calculation.
The collateral deduction and liquidation bonus
The collateral deduction covers the oracle-valued debt repayment plus the applicable liquidation bonus. That bonus gives liquidators an incentive to commit funds and pay execution costs. Its size depends on the relevant configuration; it is not a universal charge across every asset and version. Where the protocol takes a liquidation fee from the bonus, the liquidator receives the remaining portion.
The borrower loses collateral value beyond the debt that the liquidator repays. A lower debt balance alone therefore understates the liquidation's cost.
Network fees, trading costs, and available liquidity affect whether liquidation is profitable for the liquidator. Eligibility does not establish profitability or immediate execution.
Execution records and the remaining account
A completed liquidation has an executed transaction and corresponding changes to the borrower's debt and collateral records. A low health factor alone proves neither change.
A successful V3 liquidation emits a LiquidationCall event identifying the borrower, selected assets, debt covered, and collateral delivered to the liquidator. The event also identifies whether the liquidator received aTokens, which represent supplied assets, or underlying collateral. Where a protocol fee applies, its separate collateral transfer also contributes to the borrower's balance reduction. The event's collateral amount should therefore not automatically stand for every collateral deduction.
The remaining account data answers a different question: whether the position still has debt and enough collateral backing. Compare balances at a consistent block when reconciling the transaction. Later interest accrual or price changes can make a newer account reading differ from the immediate result.
A successful liquidation does not promise a health factor above 1. Remaining debt and collateral may leave the account eligible for another liquidation.
Adjustment readiness after a health decline
Consider an account whose health factor has fallen and whose borrower has tokens available for a repayment. Those tokens must match the debt asset that the selected market accepts, and the repayment must target the account carrying that debt. A matching ticker on another network does not establish compatibility. Any required spending permission must also be in place before repayment can execute.
- If the available tokens match the debt reserve, repayment can reduce that borrowing balance.
- If the available asset is eligible collateral instead, supplying and enabling it can increase backing while leaving the debt outstanding.
- If the asset belongs to another market or network, its wallet balance does not establish readiness for this repayment.
- If a required approval remains incomplete, the expected repayment has not occurred.
- If liquidation executes before the adjustment, use the changed balances when assessing the remaining obligation.
With the repayment prerequisites satisfied, the borrower submits the repayment and compares its expected effect with the resulting account record. The debt should fall by the amount actually repaid, allowing for accrued interest. If all other inputs stay unchanged, the health factor should improve. An unchanged debt record does not confirm completion. A price movement or an intervening liquidation invalidates the earlier health estimate, even when the repayment itself succeeds.
Execution restrictions and interrupted adjustments
A health factor below 1 is necessary for ordinary liquidation, but the transaction must also satisfy the selected market's validation rules. V3 validates the selected debt and collateral reserves, including their active and paused states. Implementations with liquidation grace periods also check whether those periods have expired. Such restrictions depend on the deployment and its state; crossing the health threshold does not itself grant a standard recovery period.
A pause can also prevent repayment where the relevant reserve's rules prohibit that operation. A failed adjustment leaves the intended debt reduction incomplete. Likewise, an earlier account preview cannot reserve execution priority against a liquidation transaction. Transaction ordering determines which permitted action changes the account first, and the later transaction encounters the resulting state.
What remains after a liquidation?
A liquidation can leave outstanding debt and collateral, clear the selected borrowing balance, or exhaust collateral before all debt receives repayment. Clearing one borrowed asset does not establish that every obligation has ended. Any remaining ordinary borrowing balance continues under its applicable interest terms.
Implementations with the V3.3 deficit mechanism can remove uncovered account debt and record a reserve deficit when liquidation exhausts the account's collateral. That accounting outcome does not return the collateral that liquidation consumed. A zero debt display therefore needs the transaction context to distinguish repayment from deficit recognition.
Remaining supplied assets still require a withdrawal transaction to reach the wallet. Withdrawal depends on available liquidity and any collateral requirement for debt that remains. If all borrowing obligations have ended, the account no longer needs collateral backing for those obligations, but a liquidity shortage can still prevent immediate withdrawal.
Aave liquidation: questions and answers
Can disconnecting my wallet prevent Aave liquidation?
Disconnecting a wallet does not stop liquidation of an eligible lending position. The protocol stores the collateral and debt independently of the interface connection. Interest and oracle valuations continue to affect account health while the wallet is disconnected. Liquidators can submit eligible transactions without waiting for the borrower to reconnect.
Does revoking a token approval block a liquidator?
Revoking a wallet's token approval does not remove the protocol's ability to liquidate supplied collateral. Liquidation uses assets already held within the lending position and does not require a fresh spending approval from the borrower. Revoking an approval can instead affect a later repayment that needs permission to transfer repayment tokens from that wallet.
Which of my V3 supplies can a liquidator take?
A V3 liquidator can select a supplied asset that the account uses as collateral, subject to the liquidation rules. A supply with collateral use disabled is not eligible for that seizure. Disabling collateral is itself subject to account-health checks, so it cannot simply remove backing that an outstanding loan requires.
Will a price recovery return collateral from a completed liquidation?
A later price recovery does not reverse a completed liquidation or return the collateral that it transferred. Improved prices can change the health of the remaining position. If the recovery occurs before a liquidation executes and removes eligibility, the contract instead evaluates that healthier state when processing the attempted transaction.
How can I estimate a liquidation price with several collateral assets?
A liquidation-price estimate for several collateral assets must specify which prices change and which other inputs remain fixed. The health calculation combines their weighted contributions with the value of every outstanding debt. Different combinations of price movements can reach the same threshold, so the account generally has no single liquidation price that applies to every possible market movement.