# Liquidation

> When a borrower's collateral is sold off automatically because their loan has fallen below the safety threshold.

Canonical URL: https://fudfomo.co/glossary/liquidation
Source: What The Block! Dictionary v1.0 (last updated 2026-04-25), browsable at https://wtb.fudfomo.co.

## Definition

Liquidation happens in DeFi lending and on margin platforms when the value of your collateral drops too close to the value of what you borrowed. To protect lenders, the protocol or exchange sells your collateral, often at a small discount, to repay the loan.

Liquidations can cascade in falling markets as forced selling pushes prices down further, triggering more liquidations. Keeping a buffer between your collateral and the liquidation threshold is a basic part of risk management.

## Related terms

- [Collateral](https://fudfomo.co/glossary/collateral): An asset you lock up to back a loan. If the loan is not repaid, the collateral can be taken.
- [Lending Protocol](https://fudfomo.co/glossary/lending-protocol): A DeFi app that lets users deposit crypto to earn interest and others borrow against collateral.
- [Leverage](https://fudfomo.co/glossary/leverage): Trading with borrowed funds, so a small move in the price has a much bigger effect on your position.
- [Margin](https://fudfomo.co/glossary/margin): The capital you put up to open and maintain a leveraged position.

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