Liquidation is a forced position reduction after an account falls below a platform’s collateral requirement. It applies to borrowed trading exposure and secured loans, not to an ordinary unborrowed coin balance. The trigger also depends on the product. A futures venue monitors account equity and maintenance margin, while an onchain lender can use a health factor tied to collateral, debt and asset-specific thresholds.
Margin determines how much price movement an account can absorb
Suppose a trader posts $200 to control a $1,000 long position. A falling market creates an unrealized loss that reduces account equity. The venue can close some or all of the position once that equity no longer covers its maintenance requirement. Fees, financing payments, risk tiers and other open positions may move the actual threshold, so dividing 100 by the displayed multiple is only a rough shortcut.
Kraken’s official margin documentation makes a related point: the amount set aside as margin is not a cap on the position’s possible loss. Its example shows that a position can lose more than the margin initially used. Anyone opening a borrowed position should therefore read the venue’s current equity formula, maintenance schedule and closeout rules instead of relying on a generic calculator.
Isolated and cross margin expose different balances
Isolated margin assigns a defined pool of collateral to one position. Cross margin draws support from a wider set of eligible account balances. Cross margin may keep one position open longer, but it can also expose more of the account to a severe move. Isolated margin narrows that pool, though fees and venue terms still affect what remains after a closeout.
The relevant reference price may differ from the last trade shown on a chart. Some venues use a mark or index price to reduce the effect of a brief move on one order book. A liquidation estimate is therefore meaningful only when it comes from the same venue, product and margin mode as the position.
Aave uses health factor for borrowing positions
Aave documents health factor as total collateral value multiplied by the weighted average liquidation threshold, divided by total borrow value. A value below 1 indicates that the borrowing position is eligible for liquidation. The formula is account-specific because supported assets can have different thresholds.
Consider $10,000 of collateral with an illustrative weighted threshold of 80% and $6,000 of debt. The health factor is 1.33. If collateral falls to $7,500 while the threshold and debt stay fixed, the result reaches 1.00. Real positions also change as interest accrues, oracle prices move and governance adjusts risk parameters. The worked numbers explain the formula; they are not current parameters for any asset.
Build a product-specific risk check
For a futures position, record the side, size, entry price, margin mode, current mark price, maintenance tier, fees and financing costs. Check whether other positions share the same collateral. For an onchain loan, list each collateral asset, each debt asset, the displayed health factor, oracle source and applicable liquidation thresholds.
Reducing position size or repaying debt generally creates more room before a threshold. Adding collateral may also increase the buffer, but it places more assets inside the same custody or smart-contract system. A stop order cannot guarantee protection during a price gap or a thin market. Before committing funds, calculate several adverse scenarios from the platform’s own rules and decide how much collateral can be exposed to a forced close.
Adapted from What Is Liquidation in Crypto? Margin, Price Math, and Risk.