Skip to content

Liquidations

Borrowing introduces liquidation risk. If your position falls below the liquidation threshold, part of your collateral can be seized to repay debt.

Why Liquidations Happen

A position becomes liquidatable when the value of your collateral no longer safely covers your debt. This can happen if:

  • The LP token price drops
  • Interest accrues on your debt
  • You borrow too close to the maximum allowed

The lending protocol uses an oracle-based price to determine your collateral value and compares it to your outstanding debt.

What Gets Seized

Liquidations can be total or partial, depending on the lending protocol in the market. On Morpho, the only lending protocol supported at launch, liquidations are primarily total unless you opt for the pre-liquidation situation. In all cases, your collateral is seized to bring the position back above the threshold. The seized amount:

  • Reduces your collateral balance
  • Lowers your debt (the liquidator repays on your behalf)
  • Stops accruing rewards immediately on the seized portion

You keep any rewards earned up to the liquidation event.

How the Process Works

  1. The lending protocol transfers wrapper tokens to a liquidator
  2. The liquidator unwraps those tokens to receive the underlying RewardVault shares
  3. The liquidator repays debt in the loan asset

The unwrap step is required so rewards stop for the liquidated portion and accounting stays accurate.

How to Reduce Liquidation Risk

  • Borrow below the maximum (LLTV is not a target)
  • Keep a buffer for price volatility
  • Repay or add collateral if your health factor drops
  • Avoid borrowing during high volatility

If You Are Liquidated

Whether you have been totally or partially liquidated, the rewards have been claimed for you during the liquidation process.

For Liquidators

If you are liquidating, you MUST call the wrapper's claimLiquidation after receiving wrapper tokens. This unwraps the seized collateral and keeps reward accounting consistent.