Understand what happens during a liquidation event on Borrow, how much collateral you lose, and what options you have before and after liquidation.
Liquidation is the most important risk to understand when borrowing against Bitcoin. If the value of your BTC collateral drops too far relative to your loan balance, the lending protocol will allow third-party liquidators to step in and close part or all of your position. This guide explains exactly what happens during a liquidation event on Borrow by Sats Terminal, how much you stand to lose, and what you can do before and after it happens.
Lending protocols need a mechanism to ensure loans remain solvent. When you borrow stablecoins against your BTC, the protocol needs assurance that there is always enough collateral to cover the debt. If BTC price falls and your collateral becomes worth less than (or close to) your outstanding debt, the protocol is at risk of becoming insolvent.
Liquidation prevents this. When your loan-to-value ratio crosses a critical threshold, the protocol opens your position to third-party liquidators who repay some of your debt in exchange for receiving a portion of your collateral at a discount. This discount—the liquidation penalty—incentivizes liquidators to act quickly.
Everything starts with a drop in Bitcoin's price. As BTC falls, the USD value of your collateral decreases while your stablecoin debt stays the same. This causes your LTV ratio to rise.
For example, if you deposited 1 BTC worth $60,000 and borrowed $30,000 USDC, your initial LTV is 50%. If BTC drops to $40,000, your LTV rises to 75% ($30,000 / $40,000). If it drops further to $36,000, your LTV hits 83.3%.
Each lending protocol defines a liquidation threshold—the LTV at which a position becomes eligible for liquidation. Common thresholds include:
When your LTV crosses this threshold, your health factor drops below 1.0, and your position is now open to liquidators.
Liquidators are automated bots (and sometimes individuals) who constantly monitor lending protocols for positions that have crossed the liquidation threshold. When they find one, they execute a smart contract call that:
The key detail is that liquidators receive more collateral than the debt they repaid is worth. The difference is the liquidation penalty, and it comes out of your pocket.
After the liquidation transaction executes:
In many cases, a single partial liquidation is enough to bring your LTV back below the threshold. But if BTC continues to drop, additional liquidations can follow.
The liquidation penalty is the premium that liquidators receive on top of the debt they repay. It represents your direct loss during a liquidation event.
Aave v3 uses a close factor of 50%, meaning a liquidator can repay up to 50% of your outstanding debt in a single liquidation event. The liquidation bonus (penalty to the borrower) for BTC-type collateral is typically 5–10%, depending on the specific asset and chain.
Example on Aave v3:
Morpho Blue uses a different liquidation mechanism. In Morpho Blue, when a position is underwater, the liquidator can repay debt and receive collateral, but the mechanics around close factors and penalties are configured per market. Some Morpho Blue markets use a more gradual liquidation approach, while others may liquidate a larger portion at once.
Centralized lending partners typically have their own liquidation procedures, which may differ significantly from DeFi protocols. Some CeFi lenders provide margin calls before liquidating, giving you a window to add collateral or repay debt. Others may liquidate automatically at specific thresholds. The exact terms are established when you accept the loan offer.
It is critical to understand that Borrow by Sats Terminal does not execute liquidations. Borrow is an aggregator and interface layer—it connects you to lending protocols and manages the collateral preparation process.
Concretely, Borrow surfaces offers from Aave v3, Morpho Blue, and CeFi lenders and automates the bridging, wrapping, and supply steps that put your BTC into the chosen venue. After that, the lender's own liquidation rules govern the position — Borrow provides visibility, not intervention. Once your collateral is supplied to a protocol, the protocol's smart contracts govern everything, including liquidation.
Borrow's role during a liquidation event:
This is a fundamental aspect of non-custodial lending. The same property that ensures Borrow cannot take your funds also means it cannot intervene to save your position from liquidation.
Your collateral stays in a self-custodial Privy wallet that only you can authorize, and every supply, borrow, repay, or withdraw action requires your explicit on-chain approval. There is no Sats Terminal-side override switch, by design. You are in control, and that includes being responsible for managing your own risk.
Most liquidation events are partial liquidations—only a portion of your debt is repaid and a portion of your collateral is taken. After a partial liquidation, you still have an active loan position with remaining collateral and remaining debt.
Full liquidation can occur if:
Even in a full liquidation, you typically retain any stablecoins you originally borrowed (they are already in your wallet). What you lose is the collateral—specifically, the collateral plus the liquidation penalty.
This is an important point that borrowers sometimes overlook: you keep the stablecoins you borrowed. Liquidation does not take away the stablecoins already in your wallet. What it takes is collateral.
After a partial liquidation:
After a full liquidation:
The net financial impact depends on BTC's price at the time of liquidation and the size of the penalty.
Prevention is always better than dealing with the aftermath. Here are the most effective strategies:
The simplest protection is to borrow less than you could. If a protocol allows you to borrow up to 75% LTV, borrowing at 40–50% LTV gives you a substantial buffer against BTC price drops. See How to Reduce Liquidation Risk for detailed strategies.
The Borrow dashboard displays your health factor in real time. A health factor above 1.5 is generally comfortable. Below 1.2, you should be actively considering adding collateral or making a partial repayment. Below 1.05, liquidation is imminent.
Use Bitcoin price alert services to notify you when BTC drops to levels that would threaten your position. Calculate in advance which BTC prices correspond to which LTV ratios for your specific loan, and set alerts well before the critical threshold.
Having USDC or USDT on hand allows you to make a quick partial repayment to lower your LTV. This is often faster and more capital-efficient than adding more BTC collateral (which requires the full deposit and bridging process).
If you have additional BTC, you can deposit more to increase your collateral and lower your LTV. Keep in mind that BTC deposits take 30–60 minutes to confirm and process, so do not wait until the last minute.
If your loan has been partially liquidated, you still have an active position. Here is what to consider:
Check your new LTV ratio and health factor. After a partial liquidation, your position is typically healthier (lower LTV) than it was immediately before. But if BTC price continues to fall, you could face another liquidation.
You have two options:
The right choice depends on your outlook on BTC price and whether you still need the borrowed stablecoins.
Analyze what happened. Were you borrowing at too high an LTV? Did BTC drop faster than you expected? Did you have adequate monitoring in place? Use these insights to set more conservative parameters for future loans.
Liquidation thresholds are enforced based on price data from blockchain oracles. These are smart contracts that feed external price data (like BTC/USD) to the lending protocol. The quality and update frequency of the oracle directly affect when liquidation can occur.
Major protocols use trusted oracles like Chainlink that update frequently and have robust mechanisms to prevent manipulation. However, in periods of extreme volatility, there can be brief delays between a real-world price drop and the oracle's on-chain update. This means liquidations might execute at slightly different prices than what you see on a centralized exchange.
Borrow by Sats Terminal operates on a non-custodial model. Every action—borrowing, repaying, adding collateral—requires your explicit approval. This extends to the liquidation context: because Borrow never takes custody of your funds, it also cannot intervene in protocol-level operations like liquidation.
This is a design feature, not a limitation. It means:
For more details on liquidation mechanics, see What Is Loan Liquidation?. For practical prevention strategies, visit How to Reduce Liquidation Risk. And to stay on top of your position, check out How to Monitor Loan Health on Borrow.
Understanding liquidation is essential for every borrower. While it sounds intimidating, the risk is manageable with conservative LTV ratios, active monitoring, and a clear plan for when BTC price moves against you.
Common Questions
A liquidation is triggered when your loan-to-value (LTV) ratio exceeds the liquidation threshold set by the lending protocol. This typically happens when the price of your BTC collateral drops significantly. Each protocol has different thresholds—for example, Aave v3 might liquidate at 82.5% LTV while Morpho Blue may use a different threshold. When the threshold is crossed, third-party liquidators can repay part of your debt in exchange for a portion of your collateral at a discount.
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