Liquidation Threshold Limits

Liquidation Threshold Limits define the specific collateralization ratios at which a user's position in a lending or derivative protocol becomes eligible for liquidation. These limits are set to protect the protocol's solvency by ensuring that there is always enough collateral to cover the debt even if the asset price drops significantly.

By setting these thresholds, the protocol creates a clear, predictable mechanism for managing risk and maintaining system health. These parameters must be carefully calibrated based on the volatility of the underlying assets, as overly aggressive thresholds can lead to unnecessary liquidations, while too-loose thresholds can leave the protocol vulnerable to insolvency.

They are a core component of the risk management framework for any decentralized financial system.