Liquidation Threshold
The collateral-to-debt level at which a protocol allows a borrower's collateral to be sold to repay the loan.
The threshold is set per collateral asset and sits above the collateral factor, and the gap between the two is the buffer a borrower has after taking the maximum loan. When a position crosses the threshold, a liquidator may repay part of the debt and claim collateral at a discount, called the liquidation bonus or penalty, which is what pays for the service. Many protocols also define a close factor limiting how much of a single position can be repaid in one liquidation, so a position is often reduced rather than closed entirely. On derivatives venues the equivalent concept is the maintenance margin.
In de praktijk
A protocol may allow borrowing against an asset up to a set fraction of its value while permitting liquidation only at a higher fraction, so the gap between them is the borrower's cushion.
Het veelvoorkomende misverstand
The liquidation threshold is not the same as the maximum borrowing limit; the distance between them is the entire margin for error a borrower has.