Liquidations
How Merum liquidates undercollateralized positions to keep the protocol solvent, and how to avoid being liquidated.
Liquidation is the mechanism that keeps Merum solvent. When a borrower's collateral falls too far in value relative to their debt, a portion of that collateral is sold to repay debt and restore a safe ratio. This protects USDC suppliers from loss.
Key thresholds
Every position is measured by its loan-to-value (LTV) — the USD value of the debt divided by the USD value of the collateral.
| Parameter | Value | Meaning |
|---|---|---|
| Maximum LTV | 60% | The most you can borrow against your collateral at the moment you open or increase a loan. |
| Liquidation threshold | 75% | If your LTV rises to this level, your position becomes eligible for liquidation. |
The gap between the 60% borrowing limit and the 75% liquidation threshold is your safety buffer. A position opened at the maximum 60% LTV can absorb roughly a 20% fall in the BTC price before reaching the liquidation threshold.
How a liquidation happens
- The price oracle reports a new LBTC price. See Oracles for how that price is formed.
- A position's LTV is recalculated. If it has reached or exceeded the 75% liquidation threshold, the position is flagged as liquidatable.
- A liquidator (a third-party bot or any party permitted by the contracts) repays part of the borrower's USDC debt.
- In exchange, the liquidator receives an equivalent value of the borrower's LBTC collateral plus a liquidation bonus (the discount that incentivizes liquidators to act). The bonus is paid out of the liquidated collateral.
- Only enough collateral is sold to bring the position back below the liquidation threshold (a partial liquidation), unless the position is too small or too far underwater, in which case more may be liquidated.
The liquidation bonus is a real cost to the borrower: you lose collateral worth more than the debt repaid. Avoiding liquidation is almost always cheaper than being liquidated.
How to avoid liquidation
- Borrow below the maximum. Opening a loan at 40–50% LTV instead of 60% leaves a larger buffer.
- Watch the BTC price. Your liquidation risk is driven by the price of Bitcoin, not by anything Merum controls.
- Add collateral or repay before your LTV approaches 75%. Both actions lower your LTV immediately.
- Account for accruing interest. Your debt grows over time at the fixed borrow APR, which slowly raises your LTV even if the price is flat.
Bad debt
In a severe, fast market move, the collateral sold in a liquidation may not fully cover the debt — this is bad debt. Merum's risk parameters (a conservative max LTV, a liquidation threshold set below 100%, and a multi-source oracle) are designed to make this rare, but it is not impossible. Bad debt, if it occurs, is borne first by protocol reserves and then by suppliers. See Risk disclosures.