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.
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.
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?
The platform monitors your collateral's health factor (a metric indicating how close you are to liquidation).
If your health factor drops below a critical level (e.g., due to price declines), liquidation is triggered.
The platform sells enough collateral to repay the borrowed amount plus fees.
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