Scenario: a crypto-backed loan meets a 30% price drop
Alex deposits 10 units of a volatile token worth $3,000 each ($30,000) and borrows $15,000 of a stablecoin. The protocol's liquidation threshold for this collateral is 80%. Then the token falls 30%.
The assumptions
| Input | Value |
|---|---|
| Collateral | 10 units at $3,000 |
| Debt | $15,000 (stable value) |
| Liquidation threshold | 80% |
| Liquidation penalty | 5%, close factor 50% |
| Borrow rate | 0%, then 8% APR for a year (illustrative) |
Step by step
- Starting position. Health factor = ($30,000 × 0.80) ÷ $15,000 = 1.60. Liquidation price = $15,000 ÷ (10 × 0.80) = $1,875.00, a 37.5% fall from today.
- After a 30% fall. At $2,100 the collateral is worth $21,000 and the health factor is 1.12. Still above 1, but the buffer left is a further 10.7% fall.
- Interest moves the line. If the loan runs a year at 8% APR without repayment, debt grows to $16,200.00 and the liquidation price rises to $2,025.00.
- If the price touches liquidation. A liquidator can repay up to half the debt ($8,100.00) and takes collateral worth that plus the 5% penalty: about 4.200 units, with $405.00 lost to the penalty.
Health factor along the way (no interest)
| Price | Collateral value | Health factor |
|---|---|---|
| $3,000 | $30,000 | 1.60 |
| $2,700 | $27,000 | 1.44 |
| $2,400 | $24,000 | 1.28 |
| $2,100 | $21,000 | 1.12 |
| $1,875 | $18,750 | 1.00 |
| $1,800 | $18,000 | 0.96 |
Questions people ask
Why doesn't liquidation happen at a 50% loan-to-value?
The protocol liquidates when the debt exceeds the collateral value times the liquidation threshold, here 80%, not at a fixed loan-to-value.
Does a liquidation close the whole loan?
Often not. With a 50% close factor, a liquidator can repay up to half the debt at a time.
Names, rates and prices in this scenario are illustrative and computed for education. They aren't forecasts, quotes or recommendations.
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