On-Chain Liquidation Thresholds

On-Chain Liquidation Thresholds are the pre-defined mathematical conditions programmed into a smart contract that dictate when a user's collateral must be sold to cover their debt. These thresholds are typically set as a percentage of the collateral's value relative to the borrowed amount.

When the value of the collateral drops below this limit, the position becomes under-collateralized, and the liquidation process begins. The precision of these thresholds is vital for maintaining the solvency of the entire protocol.

If they are set too loosely, the protocol risks insolvency; if too tight, users may be liquidated prematurely during minor market fluctuations. They are fundamental to margin trading dynamics.