Risk essentials

Understanding liquidations

Liquidation is the mechanism that keeps a lending protocol solvent — and the one outcome borrowers most want to avoid. If you only read one risk page before borrowing, make it this one.

Why liquidations exist

Every loan on Tectonic is over-collateralised: your collateral is worth more than your debt. If that cushion erodes — collateral falls, the borrowed asset rises, or interest piles up — the protocol needs a way to recover the loan before it goes under-water. Liquidation is that way. Without it, suppliers could lose their deposits, so it protects the whole pool, not just the protocol.

What triggers it

Each collateral asset has a liquidation threshold — the loan-to-value point at which the position is no longer considered safe. Note that Tectonic sets the amount you are allowed to borrow below this threshold (the borrow limit is roughly 90% of the liquidation LTV), so there is a built-in buffer between "fully borrowed" and "liquidatable." When your debt climbs past the liquidation threshold relative to your collateral, the position becomes eligible for liquidation.

The penalty and who performs it

Liquidations are carried out by independent parties (often bots) who repay part of a risky borrower's debt and, in exchange, claim some of their collateral at a discount. On Tectonic this is structured around a liquidation fee of about 10%: the bulk — on the order of 7.2% — goes to the liquidator as the incentive that makes them act quickly, while the remainder (around 2.8%) goes to the protocol treasury. For the borrower, that fee is a real loss layered on top of losing the collateral that was sold.

A worked example

Suppose you supply $1,000 of CRO (50% collateral factor) and borrow $400 of USDC — comfortably inside your $500 limit. If CRO then falls 30%, your collateral is worth $700 and your borrowing power drops to $350, below your $400 debt. Your position is now eligible for liquidation: a liquidator repays a chunk of the USDC debt and seizes CRO worth that amount plus the penalty. You keep the borrowed USDC, but you lose more CRO than the debt alone, and the penalty is gone for good.

How to stay clear of it

• Borrow conservatively. Using a small fraction of your borrowing power gives prices room to move.
• Watch the health factor. Treat it as the dashboard's most important number.
• Mind interest drift. Debt grows even when you do nothing; check in regularly.
• Keep repayment funds ready. A small reserve of the borrowed asset lets you de-risk fast in a sell-off.
• Prefer stable collateral if you want fewer surprises.