DeFi Liquidation: What It Is, Why It Happens, and How to Avoid It

When you borrow crypto in a DeFi liquidation, the automatic process that seizes your collateral if your loan becomes under-collateralized. Also known as margin call in traditional finance, it’s the silent killer of many DeFi users who think they’re earning high yields but don’t realize they’re one price drop away from losing everything. This isn’t theoretical—it’s happened to thousands. People locked up their ETH or BTC as collateral to borrow USDT, only to watch their entire position vanish when Bitcoin dropped 20% overnight. No warning. No second chance.

DeFi liquidation doesn’t happen because you’re bad at trading. It happens because you’re using a system designed for machines, not humans. Platforms like Aave, Compound, and MakerDAO use liquidation threshold, the minimum collateral-to-debt ratio you must maintain to avoid being wiped out. If you borrow $10,000 worth of USDT and put up $15,000 in ETH as collateral, your loan-to-value ratio is 66%. But if ETH drops 30%, your collateral is now worth $10,500—and your loan is suddenly over 95% of your collateral. The protocol doesn’t ask you. It doesn’t text you. It just sells your ETH to cover the debt. That’s crypto collateral, the asset you pledge to secure a loan in DeFi, which can be seized without notice. And if you borrowed more than you should have, you get nothing left—not even your original deposit.

Some people think they’re safe because they use stablecoins or low-volatility tokens. But that’s a trap. The problem isn’t just price swings—it’s how fast they happen. In 2022, when TerraUSD collapsed, entire DeFi positions were liquidated in minutes because the system couldn’t adjust. Even if your collateral was Bitcoin, the panic spread. Lenders rushed to close loans. Bots triggered liquidations at the first sign of trouble. You didn’t need to be reckless to lose everything. You just needed to be late.

And here’s the real kicker: most DeFi platforms don’t warn you when you’re close to liquidation. They don’t send emails. They don’t call. They rely on you to monitor your position 24/7. If you’re using a wallet app that doesn’t show your loan-to-value ratio in real time, you’re flying blind. You need to know your liquidation threshold, the minimum collateral-to-debt ratio you must maintain to avoid being wiped out for every protocol you use. And you need to keep extra cushion—like keeping your loan at 50% of your collateral instead of 75%.

What you’ll find in these posts isn’t theory. It’s real stories. People who lost everything because they trusted a high-yield farm without understanding the risk. Platforms that vanished overnight, leaving users with no recourse. And the few who survived by using simple rules: never borrow more than half your collateral, never stake your only crypto, and always know what happens if the market moves against you. This isn’t about getting rich quick. It’s about not getting wiped out slow.