> For the complete documentation index, see [llms.txt](https://nx-finance.gitbook.io/nx-academy/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://nx-finance.gitbook.io/nx-academy/nx-101/module-2.2-liquidation-basics.md).

# Module 2.2｜Liquidation Basics

## Understanding Liquidation Risk

Liquidation occurs when **the value of your collateral drops below a certain threshold set by the platform.** This happens because the platform needs to recover its loaned funds.

{% hint style="success" %}
NX Finance uses a 95% liquidation threshold, which means the platform will liquidate positions when the collateral value drops to 95% of the borrowed amount.
{% endhint %}

### Why Does Liquidation Happen?

When you borrow funds using leverage:

* The borrowed amount must remain backed by sufficient collateral.
* If the collateral value falls too much due to market volatility or price declines, it no longer covers the borrowed amount.
* To protect itself from losses, the platform liquidates (sells) your position to repay the loan.

### When Does Liquidation Happen?

The liquidation threshold depends on:

* The leverage ratio: Higher leverage ratios increase liquidation risk because less collateral backs each borrowed dollar.
* Collateral type: Assets with high volatility are more likely to trigger liquidation.

### How Does Liquidation Work?

{% stepper %}
{% step %}
The platform monitors your collateral's health factor (a metric indicating how close you are to liquidation).
{% endstep %}

{% step %}
If your health factor drops below a critical level (e.g., due to price declines), liquidation is triggered.
{% endstep %}

{% step %}
The platform sells enough collateral to repay the borrowed amount plus fees.
{% endstep %}
{% endstepper %}