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Liquidation Close Factor

A liquidation close factor caps how much eligible debt can be repaid in one liquidation. Learn how the cap, health factor, bonus, and protocol rules interact.

Updated

For educational purposes only; not investment advice. Investing may result in loss.

Direct answer

A liquidation close factor is the maximum share of an eligible borrower’s debt that a protocol permits a liquidator to repay in one liquidation. It limits the size of a single liquidation, not the borrower’s total eventual loss. If the position remains liquidatable after a partial repayment, another liquidation can follow.

The rule is protocol-specific. It may be a governance parameter, depend on the position’s health factor or size, or be absent from a newer liquidation design. Read the deployed contract and current market configuration before relying on a quoted percentage.

How it works

Once a position crosses its protocol’s liquidation threshold, a liquidator chooses a debt asset to repay and collateral to receive. The contract checks eligibility, applies the close-factor limit and other caps, reduces the borrower’s debt, and transfers or accounts for collateral plus the applicable liquidation bonus.

For a simple one-debt position, the close-factor ceiling can be written as maximum close-factor repayment = eligible debt × close factor. The actual repayment is the smallest of that ceiling, the liquidator’s requested amount, the selected debt balance, and any tighter protocol or collateral constraint.

Ignoring fees, caps, and rounding, the collateral delivered is approximately repaid debt value × (1 + liquidation bonus). The close factor controls debt repaid; the liquidation bonus controls collateral awarded. They are different parameters.

Worked example

Assume a position has $100,000 of debt, $121,250 of collateral, and an 80% weighted liquidation threshold. Its health factor is ($121,250 × 80%) ÷ $100,000 = 0.97, so it is liquidatable. If the applicable close factor is 50%, a liquidator requesting to repay $60,000 is capped at $100,000 × 50% = $50,000.

With an 8% liquidation bonus and equal debt and collateral oracle values, the liquidator receives approximately $50,000 × 1.08 = $54,000 of collateral. The position then has $50,000 of debt and $67,250 of collateral, giving a new health factor of ($67,250 × 80%) ÷ $50,000 = 1.076. That restores health in this simplified example, but a later collateral-price decline could make the position liquidatable again.

Protocol differences

Aave’s current liquidation guide states that up to 50% of total debt can be liquidated when health factor is above 0.95 and both collateral and debt are at least $2,000. It permits up to 100% when health factor is 0.95 or below, or when either value is below $2,000; its dust rules can also require a full clear rather than leaving less than $1,000 of collateral or debt.

Compound V2 defines closeFactorMantissa as the 0%-to-100% share of one borrowed asset that can be repaid in a liquidation transaction; with multiple borrowed assets, the factor applies to the selected asset rather than aggregate borrowing. Compound III instead uses an account-absorption and collateral-sale design, so a V2-style close factor should not be assumed there.

Risks and controls

  • A close factor is not a guaranteed loss cap. Repeated liquidations, a larger factor under severe stress, bonuses, protocol fees, and adverse price moves can consume more collateral.
  • A successful partial liquidation does not guarantee a healthy position. Recalculate health using the remaining debt, remaining collateral, current oracle prices, and applicable liquidation thresholds.
  • Parameters and implementations can differ by protocol version, network, market, and asset. Verify the deployed contract and governance-approved configuration rather than copying a percentage from another market.
  • Thin liquidity, oracle updates, transaction ordering, and collateral exhaustion can change execution or leave bad debt. A displayed estimate is not a transaction guarantee.

Common misconceptions

  • “The close factor is always 50%.” No. It is protocol- and condition-specific, and some liquidation engines do not use a V2-style close factor at all.
  • “A 50% close factor means exactly half the whole account is liquidated.” Not necessarily. The cap may apply to total debt or one selected borrowed asset, while collateral availability and other rules can lower or increase the executable amount.
  • “Partial liquidation automatically restores health.” Not always. The result depends on the liquidation bonus, remaining asset mix, thresholds, and prices after execution.
  • “Close factor and liquidation bonus are the same parameter.” No. One limits repayment size; the other determines the extra collateral awarded for repaying debt.

Sources

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