Liquidation is one of the most painful experiences in DeFi. You deposit collateral, borrow against it, and if the market moves against you, your position gets automatically closed — at a loss — to repay the borrowed amount. No warnings, no grace period. Just a transaction that takes your collateral.
On Solana, the three main lending protocols — Kamino Finance, MarginFi, and Save (formerly Solend) — all have automated liquidation systems. Understanding how they work is essential before borrowing a single dollar.
This guide explains liquidation mechanics, how to monitor your position, and the strategies to keep yourself safe.
What Is a Liquidation?
When you borrow in DeFi, you deposit collateral worth more than what you borrow. The ratio between your collateral value and your loan is called your health factor (or collateral ratio).
If the value of your collateral drops (or your loan value rises, as with variable rates), your health factor deteriorates. When it hits the liquidation threshold, a liquidator — an automated bot or user — steps in:
- They repay part of your debt
- They receive your collateral at a discount (the liquidation bonus or liquidation penalty, typically 5-15%)
- Your position is partially or fully closed
Example:
- You deposit $10,000 SOL as collateral
- You borrow $5,000 USDC (50% LTV)
- SOL price drops 40%, making your collateral worth $6,000
- Your LTV is now 83%, above the liquidation threshold of ~80%
- A liquidator repays $3,000 of your USDC debt
- They receive $3,300 of your SOL (10% bonus)
- You keep the remaining SOL after liquidation
You've lost value, paid the liquidation penalty, and still have remaining debt. The message: liquidation is expensive.
How Each Protocol Handles Liquidations
Kamino uses a health factor system (similar to Aave on Ethereum). Your health factor is displayed prominently in the dashboard.
- Health factor = 1.0: Exactly at the liquidation threshold. You will be liquidated immediately
- Health factor > 1.5: Relatively safe for short-term holds
- Health factor > 2.0: Comfortable buffer for most market conditions
Kamino supports multiple assets as collateral including SOL, JitoSOL, USDC, USDT, and various LP tokens. Each asset has its own collateral weight and liquidation parameters based on its volatility and liquidity.
Kamino's Multiply feature (leveraged staking) is a common source of liquidations — users who lever up JitoSOL against SOL borrowing can get liquidated if the liquid staking token depeg exceeds the buffer.
MarginFi uses a risk engine that monitors positions in real time. The platform shows your account health as a percentage:
- 100%: Maximum safety
- Below 20%: Getting close to liquidation territory
- 0%: Liquidation
MarginFi allows both isolated and cross-margin positions. In cross-margin mode, all your positions are combined into one health calculation — which can be efficient but means one bad position can affect all your collateral.
Save (formerly Solend)
Save is one of the oldest Solana lending protocols. It displays a utilization ratio and borrow limit rather than a health factor, but the mechanics are the same: if your borrowed value exceeds the liquidation threshold relative to collateral, liquidators can act.
Save has separate pools (Main, Turbo, Isolated) with different risk parameters. Isolated pools for smaller tokens carry higher liquidation risk due to thinner liquidity.
Key Terms to Know
| Term | Definition |
|---|
| LTV (Loan-to-Value) | Your loan amount divided by collateral value |
| Max LTV | Maximum LTV allowed before borrowing is restricted |
| Liquidation Threshold | LTV at which liquidation becomes possible |
| Liquidation Penalty | Discount liquidators receive on your collateral (typically 5-15%) |
| Health Factor | Score showing distance from liquidation (higher = safer) |
| Collateral Weight | How much borrowing power an asset provides (e.g., 80% for SOL) |
How to Monitor Your Health Factor
On Kamino
Your health factor is shown in the dashboard next to your position. A color-coded bar indicates safety:
- Green (>2.0): Safe
- Yellow (1.5-2.0): Monitor
- Orange (1.0-1.5): Danger zone
- Red (<1.0): Liquidation imminent
On MarginFi
Account health percentage is shown on the main dashboard. Enable browser notifications in your profile settings to get alerted when health drops below a threshold.
Third-party monitoring tools
- Step Finance: Shows your DeFi positions including lending/borrowing health across protocols
- Sonar Watch: Portfolio tracker with lending position monitoring
- Birdeye: Set price alerts for your collateral assets — if SOL drops 10%, you want to know immediately
For critical positions, set up price alerts for your collateral asset on Birdeye so you receive a notification if price drops toward your liquidation level.
Calculating Your Liquidation Price
Before you borrow, calculate exactly what price would trigger your liquidation. Most lending protocol interfaces show this, but here's the manual calculation:
Formula:
Liquidation price = (Loan amount) / (Collateral units × Liquidation threshold)
Example:
- You deposit 100 SOL at $150 = $15,000 collateral
- You borrow $6,000 USDC
- SOL liquidation threshold is 80%
Liquidation price = $6,000 / (100 × 0.80) = $75 per SOL
If SOL drops to $75, you get liquidated. That's a 50% drop from $150 — which is entirely possible in crypto. This is why position sizing matters.
Strategies to Avoid Liquidation
1. Keep a conservative LTV
The most important rule: never borrow more than 50% of the max allowed LTV. If the max LTV is 80%, borrow no more than 40% of your collateral value. This gives you a 2x buffer before liquidation.
Aggressive LTV = higher yield potential, much higher liquidation risk.
2. Use stablecoin collateral or same-asset pairs
Borrowing USDC against USDC deposits (or USDC against USDT) means there's minimal price movement risk. Your liquidation price is essentially "never" under normal conditions.
Similarly, depositing JitoSOL and borrowing SOL means your collateral and debt move together — liquidation requires a depeg event, not just a price drop.
3. Borrow against liquid staking tokens (JitoSOL, mSOL)
Liquid staking tokens appreciate slowly over time (they accumulate staking rewards). Borrowing SOL against JitoSOL means your collateral is slowly growing relative to your debt, improving your health factor over time — the opposite of getting liquidated.
4. Set alerts well before the danger zone
Don't wait until health factor hits 1.1 to act. Set alerts at 1.5 and have a plan ready:
- How much collateral will you add?
- How much debt will you repay?
- Can you repay quickly from another source?
5. Avoid borrowing volatile assets
If you deposit SOL and borrow a volatile memecoin (if supported), a price spike in the borrowed asset can spike your effective LTV without your collateral moving. Stick to borrowing stablecoins or tokens that move in correlation with your collateral.
6. Monitor during high-volatility events
Liquidations spike during:
- Major economic news
- Crypto exchange events (exchange failures, hacks)
- Large token unlocks
- Macro risk-off events
If you're aware of a high-volatility event coming, either reduce your position or add collateral proactively.
7. Keep a repayment reserve
Always keep enough USDC or SOL in your wallet to partially repay your loan or add collateral instantly. If you're 100% deployed and your health factor suddenly drops, you need liquid assets to react.
What Happens After Liquidation
If you do get liquidated, here's what happens:
- A liquidator repays part of your debt (usually enough to bring health factor back above threshold)
- You receive the remaining collateral minus the liquidated amount and penalty
- Your loan is reduced but may not be fully closed
- You still owe any remaining debt
Partial liquidations are designed to restore health factor without fully closing your position. Full liquidations happen when the position is too underwater to partially save.
After liquidation, reassess your strategy before re-entering. A liquidation is feedback that your LTV was too high for the market conditions.
Common Liquidation Mistakes
- FOMO leverage: Borrowing at 70%+ LTV during a bull run because "it'll keep going up"
- Ignoring health factor: Setting and forgetting without any monitoring
- No price alerts: Getting surprised by a 20% drop
- Borrowing volatile assets: Misjudging the risk of the borrowed token spiking
- Farming with leverage: Using borrowed funds to farm yields that don't compensate for liquidation risk
Summary
Liquidation is not a bug — it's how DeFi lending protocols stay solvent. But losing 10-15% of your collateral to a liquidator is entirely avoidable with proper risk management.
Keep conservative LTVs, monitor your health factor regularly, set price alerts, and always have a plan for adding collateral or repaying debt quickly. The protocols — Kamino, MarginFi, Save — all give you the tools to manage this risk. Using them is your responsibility.
Explore all Solana lending protocols on MadeOnSol.
