How to Avoid Liquidation on Aave
Liquidation is the biggest risk when borrowing in DeFi. Learn proactive strategies to monitor your position, set up alerts, and take action before it's too late.
Key Takeaways
- ✓Keep Health Factor above 1.5 for volatile collateral, 1.2+ for stablecoins
- ✓Know your exact liquidation price before borrowing
- ✓Set up price alerts at multiple warning levels
- ✓Keep reserve assets ready to add collateral quickly
- ✓Consider automation tools like DeFi Saver for protection
Understanding Liquidation Risk
Liquidation happens when your Health Factor drops below 1. At that point, your collateral is worth too little relative to your debt, and liquidators can repay part of your loan and claim your collateral at a discount.
The key insight: liquidation is not instantaneous. You always have warning as Health Factor approaches 1. The goal is to take action before reaching that point.
What You Lose in Liquidation
- Liquidation penalty: 5-10% extra collateral depending on the asset
- Collateral to cover debt: Enough to repay up to 50% of your debt
- Gas costs: You pay the transaction fees for the liquidation
Example: With $10,000 debt and 10% penalty, you'd lose ~$5,500 in collateral to repay $5,000 of debt.
Health Factor Warning Levels
Your Health Factor is your early warning system. Here's how to interpret different levels:
Position is healthy. Monitor during high volatility.
Reasonable buffer. Set alerts for 1.3 and 1.2 levels.
Getting risky with volatile collateral. Consider adding collateral.
High risk zone. Take action now - add collateral or repay debt.
Critical! Immediate action required to avoid liquidation.
Position can be liquidated. Act immediately if still possible.
Pro tip: Use our Health Factor Calculator to check your position's safety at different price levels.
Strategy 1: Know Your Numbers
Before you borrow, calculate exactly what price would trigger liquidation. This is non-negotiable.
Calculate Your Liquidation Price
Liquidation Price = (Debt × 100) / (Collateral Amount × Liquidation Threshold)
In this example, if ETH drops from $3,500 to $2,409 (-31%), you get liquidated. Is that a reasonable risk? Consider:
- ETH dropped 30%+ in a single day during the March 2020 crash
- Flash crashes can happen faster than you can react
- Your liquidation price moves up as interest accrues
Use our tool: The Liquidation Calculator calculates your exact liquidation price instantly.
Strategy 2: Borrow Conservatively
Just because you can borrow 80% of your collateral doesn't mean you should. The closer you borrow to max LTV, the less room you have for price movement.
Safe Borrowing Guidelines
Borrow max 40-50% of your collateral value
Can borrow 70-80% safely (in E-Mode, up to 90%)
The 50% Rule
A simple rule: if using volatile collateral like ETH, borrow no more than 50% of what you could borrow. This gives you roughly a 40% price buffer before liquidation.
Max LTV: 80% → Target: 40%
Health Factor at 40% LTV: ~2.0
Room for price drop: ~50% before liquidation
Strategy 3: Set Up Monitoring & Alerts
You can't watch your position 24/7, but automation can. Set up alerts at multiple warning levels.
Alert Setup Guide
Start monitoring more closely. Check news for any upcoming events.
Prepare funds to add collateral. Review your position.
Take immediate action. Add collateral or repay debt now.
Monitoring Tools
- DeBank: Portfolio tracker with position monitoring
- Zapper: Dashboard for all DeFi positions
- TradingView: Set price alerts for your liquidation price
- Discord/Telegram bots: Community bots that can alert on HF changes
- Aave interface: Check your dashboard regularly
Strategy 4: Use Automation
For serious borrowers, automation removes human error and sleep requirements from position management.
DeFi Saver Protection
DeFi Saver can automatically protect your position by:
- ✓Auto-Repay: Sells collateral to repay debt when HF drops too low
- ✓Auto-Boost: Increases leverage when HF rises (for aggressive strategies)
- ✓Custom triggers: Set your own HF thresholds for actions
Note: Automation tools add smart contract risk. They have their own contracts that interact with your position. Research thoroughly before using.
Strategy 5: Keep Dry Powder
Always keep reserve assets ready to add as collateral. If a crash happens, you need to act fast.
Good Practices
- Keep 20-30% of position value in reserve
- Have funds on same chain for fast deposit
- Keep some stablecoins for debt repayment
- Have wallet ready with gas funds
Mistakes to Avoid
- All funds locked in position (nothing to add)
- Reserves on different chain (bridge takes time)
- No gas funds (can't execute transactions)
- Funds in CEX (withdrawal delays)
Emergency Actions
If your Health Factor is dropping fast, here are your options ranked by speed:
1. Repay Debt (Fastest)
RecommendedIf you have the borrowed asset, repay part of your debt. This immediately improves Health Factor. Even partial repayment helps.
2. Add Collateral
If you have reservesDeposit more collateral to increase your total collateral value. Works if you have reserves on the same chain.
3. Swap Collateral
More complexAave allows swapping collateral. Swap volatile collateral for stablecoins to eliminate price risk (but you lose upside).
4. Self-Liquidate
Last resortIf liquidation is inevitable, you can sell collateral yourself to repay debt. You avoid the liquidation penalty but eat the gas costs.
Frequently Asked Questions
What Health Factor is safe on Aave?
A Health Factor above 1.5 provides reasonable safety for volatile collateral. For stablecoins, 1.2+ is typically sufficient. Many conservative users maintain 2.0+ for peace of mind during volatile markets.
Can I undo a liquidation on Aave?
No, liquidations are irreversible once executed. The only way to prevent them is to monitor your position and take action before Health Factor drops below 1.
How much do I lose in liquidation?
You lose the liquidation penalty (typically 5-10% depending on the asset) plus the portion of collateral needed to repay up to 50% of your debt. The exact loss depends on how far below 1 your Health Factor dropped.
How fast can liquidation happen?
Liquidation can happen instantly once Health Factor drops below 1. During flash crashes, positions can go from safe to liquidated within minutes. Automated liquidation bots monitor all positions 24/7.
Should I use stop-losses for DeFi positions?
Traditional stop-losses don't work in DeFi, but you can use DeFi Saver or similar automation tools to automatically repay debt or add collateral when Health Factor drops below your threshold.
Pre-Borrowing Checklist
- Calculated my liquidation price
- Borrowing less than 50% of max for volatile collateral
- Set price alerts at warning levels
- Have reserve funds ready on same chain
- Know my emergency action plan
- Have gas funds in wallet
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Financial Disclaimer: The information provided on this website is for educational and informational purposes only and should not be construed as financial, investment, or legal advice. Cryptocurrency and DeFi investments involve substantial risk, including the possible loss of principal. Past performance does not guarantee future results. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.
Educational Purpose: This content is designed to help you understand DeFi concepts and is not a recommendation to buy, sell, or hold any cryptocurrency or use any particular protocol. The examples and calculations shown are for illustrative purposes only.
Risk Warning: DeFi protocols carry inherent risks including but not limited to: smart contract vulnerabilities, liquidation risk, impermanent loss, protocol insolvency, and regulatory changes. Never invest more than you can afford to lose.