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?

1

The platform monitors your collateral's health factor (a metric indicating how close you are to liquidation).

2

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

3

The platform sells enough collateral to repay the borrowed amount plus fees.