Glossary
Liquidation
The forced unwinding of an undercollateralized borrow position by a third party in exchange for a discount on the seized collateral.
If you borrow USDC against ETH collateral and the price of ETH drops, your collateralization ratio falls. Once it crosses the protocol's liquidation threshold, anyone can repay part of your debt and seize part of your collateral at a 5–10% discount.
The mechanism keeps the lending pool solvent without any human intervention — it is just an open call for arbitrageurs. The side effect is that volatile periods cascade: forced sales drive prices down, which triggers further liquidations.