Unit 2 · Level 3 · Lending & borrowing
Liquidations & cascades
Every DeFi loan has a health factor: a live score of how far your collateral sits above the liquidation line. Above 1, you're fine. The moment it dips below 1, any bot on the internet can repay part of your debt and seize your collateral at a discount, keeping a penalty as profit. If you did the leverage lessons in the Trading course, this is a margin call, except no one calls and no one waits.
Free to play. No ads, no token, no account needed to start.
What you get asked
What does your loan's health factor measure?
It's a distance-to-danger gauge, recalculated as prices move. DeFi loans have no due date, only a line you must never cross.
Your health factor drops below 1. What happens next?
Liquidation bots race each other for that penalty, often 5-10% of the seized collateral. There's no grace period; the whole point is that code enforces instantly.
Put a liquidation cascade in order:
Selling that causes more selling: the same doom loop as margin calls in the Trading course. On 'Black Thursday' in March 2020, cascades like this helped ETH fall roughly 40% in a day.
A DeFi liquidation is the on-chain cousin of a ___ call in leveraged trading.
Same physics: borrowed money plus falling collateral equals forced exit. The DeFi version just skips the human and the mercy.
What's the practical way to keep a DeFi loan safe?
Treat the max LTV like a cliff edge, not a target. Crypto can drop 30% overnight, so your buffer has to survive the move that happens while you sleep. 🐜
The rest of this unit
Loans with no credit check: just collateral, math, and a liquidation bot watching.