Managing Liquidation Risk in Leveraged Positions
Keep your positions safe during volatility
Strategies for managing health factors, avoiding liquidation, and surviving market volatility when using leverage.
Step-by-Step Guide
Understand Health Factors
Lending protocols express risk as a health factor. Below 1.0 = liquidation. The health factor drops as collateral value falls or debt increases.
Each protocol calculates slightly differently - know your platform's formula.
Set Conservative LTV Ratios
Even if a protocol allows 80% LTV, using 50-60% gives you buffer. The lower your LTV, the larger the price drop you can survive.
Calculate your liquidation price and set alerts well above it.
Keep Dry Powder Available
Don't deploy 100% of capital. Keep USDC ready to add collateral or repay debt if positions move against you.
20-30% reserve is reasonable for leveraged strategies.
Use Stop-Losses via Automation
Since DeFi doesn't have native stop-losses, use automation tools like keeper bots to de-risk positions at predetermined levels.
Test your automation before relying on it with real capital.
Diversify Across Protocols
Don't put all leveraged positions in one protocol. Smart contract risk is real - spread across multiple platforms.
Also diversify by collateral type and underlying asset.
Plan for Black Swans
Ask: 'What if the asset drops 50% overnight?' If the answer is 'I lose everything,' reduce leverage. Survival is the priority.
The market can stay irrational longer than you can stay solvent.
Risks to Consider
- Liquidation can happen faster than you can react
- Network congestion during volatility can prevent rescue transactions
- Cascading liquidations can accelerate price drops
- Partial liquidations may leave you in worse position
Practice With These Assets
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