Skip to main content

Quiz: Liquidation Risk Management

Test your understanding of Compound v3’s liquidation mechanics and risk tools.

1. What condition triggers a liquidation in Compound v3?

Answer: When Debt > Collateral Value × Collateral Factor (i.e., LTV reaches or exceeds the liquidation threshold), the position becomes eligible for liquidation.

2. In the liquidation process, what incentive does a liquidator receive?

Answer: The liquidator repays part of the borrower’s debt and receives an equivalent value of collateral plus a liquidation bonus (e.g., 5–10% extra collateral) as an incentive.

3. How does market volatility affect your liquidation risk?

Answer: If your collateral’s price drops, your LTV increases (debt stays constant for stablecoin debt), moving you closer to or above the liquidation threshold; rapid crashes can trigger liquidations before you can react.

4. Name two early-warning tools you can use to monitor your Compound v3 position.

Answer:

  1. Portfolio trackers (e.g., DeBank, Zapper) for dashboard alerts.
  2. Automation platforms (e.g., DeFi Saver) or on-chain monitors (e.g., Forta) to send notifications or automatically execute self-liquidation.
5. What is “close factor,” and how does it protect borrowers?

Answer: The close factor caps the maximum percentage of outstanding debt a liquidator can repay in a single transaction (e.g., 50%), preventing a single liquidation from seizing all collateral at once and giving borrowers partial recovery opportunities.