Liquidation

Liquidation is a mechanism to mitigate the risk of bad debt and protect lenders’ capital. When an account becomes unhealthy, meaning its Loan-To-Value (LTV) on a given market exceeds the market’s Liquidation Loan-To-Value (LLTV), the account’s position can be liquidated.

Liquidation is permissionless on Morpho, anyone can perform a liquidation by repaying the account’s debt in exchange for the equivalent amount in the market collateral asset, along with an incentive.
Liquidator can choose to partially or fully liquidate the position.

The Health Factor is a measure of the collateralization level and represents the state of a borrower’s position.

The higher the health factor, the safer the position from liquidation. When the health factor reaches 1 or less, the position becomes eligible for liquidation.

Health factor is visible on users’ position in the Morpho interface and has to be carefully monitored to avoid a position becoming unhealthy and facing liquidation.
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Health factor and LTV (vs LLTV) are both representing one's borrow position health.
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A position can be liquidated by anyone permissionlessly as soon as it becomes unhealthy.

The liquidation price is the price of the collateral at which one’s position will become eligible for liquidation.

Liquidation price is visible on users’ position in the Morpho interface and has to be carefully monitored to avoid a position becoming unhealthy and facing liquidation.

When your position is liquidated, the liquidator repays part or all of your debt. In exchange, they receive the equivalent amount of your collateral, plus a liquidation incentive.

This incentive is the liquidation penalty for the borrower: you lose slightly more collateral than the debt amount that was repaid.

This penalty is not paid to Morpho. It goes entirely to the liquidator, who takes the risk and pays the transaction costs to liquidate the unhealthy position.

The exact percentage depends on the market's LLTV. Higher LLTV markets usually have a higher liquidation penalty/incentive. For example, on an 86% LLTV market, the liquidation incentive is about 5%. This means that if a liquidator repays $100 of your debt, they may receive about $105 worth of your collateral.

You can avoid liquidation by keeping the health ratio of your position above 1. If necessary either by:

Health Ratio and Collateral Liquidation price are key informations to monitor to ensure your position stays healthy.