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What Is Collateral?

Collateral is like a security deposit. When you borrow, you must put up more value than you’re borrowing. This protects the lender. Example:
  • You borrow: $10,000 USDC
  • You put up: $15,000 worth of ETH
If you don’t pay back the loan, the lender gets your ETH. This is why lenders are willing to lend to strangers on the internet.

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What Is Liquidation?

Liquidation is when your collateral gets automatically sold to repay the lender. This happens in two situations:

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Situation 1: You Miss Your Repayment Deadline

If you borrow for 30 days and don’t pay back within 12-24 hours after the deadline, anyone can trigger a liquidation. Your collateral is sold, the lender gets paid, and you lose your collateral.

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Situation 2: Your Collateral Value Drops

Crypto prices are volatile. If you put up 15,000ofETHascollateral,butETHcrashesandyourcollateralisnowonlyworth15,000 of ETH as collateral, but ETH crashes and your collateral is now only worth 11,000, it’s not enough to cover the $10,000 loan anymore. When collateral drops too much, liquidation happens automatically. Real Example:
  • You borrow: 10,000 USDC
  • You put up: 15,000 USDC worth of ETH (1.5x collateral ratio)
  • ETH price drops 30%
  • Your ETH is now worth: 10,500 USDC
  • This triggers liquidation (you’re below the safety threshold)
What happens in a liquidation:
  • Your ETH collateral gets sold
  • Lender receives: 10,200 USDC (their 10,000 + 2% bonus)
  • Person who executed liquidation: 70 USDC (0.7% fee)
  • Axios protocol: 30 USDC (0.3% fee)
  • You receive: Whatever is left (roughly 200 USDC in this example)
[!WARNING] Keep your collateral healthy. If it drops too much, you lose it.