> For the complete documentation index, see [llms.txt](https://liquidx-3.gitbook.io/liquidx-whitepaper/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://liquidx-3.gitbook.io/liquidx-whitepaper/13.-lending-architecture/13.3-liquidation-system-protecting-lender-capital.md).

# 13.3  Liquidation System - Protecting Lender Capital

Liquidation is the mechanism that protects lenders. If a borrower's collateral value drops (due to market price movements) to the point where it no longer adequately covers their loan, the protocol automatically liquidates (sells) a portion of their collateral to repay the loan. This ensures lenders can always recover their capital.

\
Here is the combined table extracted from the image:

| **Health Factor Status** | **Meaning**                     | **Action Required**                                               |
| ------------------------ | ------------------------------- | ----------------------------------------------------------------- |
| > 1.5                    | Safe - excellent buffer         | No action needed                                                  |
| 1.0 – 1.5                | Warning - approaching threshold | Recommend adding collateral or repaying loan                      |
| < 1.0                    | Liquidation triggered           | Automatic smart contract liquidation - 5-8% bonus for liquidators |

Health Factor Formula: (Collateral Value x Liquidation Threshold) divided by Total Borrowed Amount. Maintaining a Health Factor above 1.5 is recommended best practice for all borrowers.

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