Learn / Intermediate
DeFi lending and liquidations
Understand collateral, borrowing limits and why a position can be liquidated.
The Token Press education desk · Reviewed 2026-09-08
How lending applications work
Decentralized finance uses blockchain applications for activities such as exchange and lending. In a collateralized lending market, a borrower supplies assets and borrows against their value under the application’s rules. Smart contracts implement accounting and transaction conditions.
The application still depends on code, price inputs, governance and the networks supporting it. The absence of a traditional branch office does not mean the absence of operational dependencies.
Why liquidation occurs
A lending protocol requires a buffer between collateral value and debt. If prices move or interest accumulates enough to breach the rules, a liquidation mechanism can sell or transfer collateral to reduce the debt.
For a simplified illustration, $150 of collateral against $100 of debt begins with a larger buffer than $110 against $100. The actual liquidation threshold is protocol- and asset-specific; this example is not a usable borrowing limit.
Read a position carefully
Check the collateral asset, borrowed asset, interest-rate model, oracle, liquidation threshold and fees. A displayed yield can combine lending interest with temporary incentive tokens.
Using a stablecoin does not remove contract risk or the possibility of a depeg. Combining multiple protocols creates dependencies between them. Before considering a transaction, explain what would happen if the collateral fell sharply, the oracle stopped updating or the application’s interface became unavailable.
Sources & further reading
Educational content. Examples are illustrative. Consult the linked documentation for current details.