How to Calculate Aave Liquidation Price
In Aave, the Liquidation Price is the value at which your collateral falls low enough to trigger a liquidation event. This happens when your Loan-to-Value (LTV) ratio exceeds the maximum threshold set by Aave for the specific collateral type.
Formula to Calculate Liquidation Price:
The formula to calculate the Liquidation Price is:
LP=DC×LTVL_P = \frac{D}{C \times LTV}LP=C×LTVD
Where:
LPL_PLP = Liquidation Price of the collateral
DDD = Total Debt (Loan Amount + Interest)
CCC = Amount of Collateral Provided
LTVLTVLTV = Loan-to-Value Ratio (as a decimal)
Example Calculation:
Suppose you:
Borrow $10,000 USDC from Aave
Provide 5 ETH as collateral
Current ETH price is $2,000
The LTV for ETH is 80% (0.8 as a decimal)
Step 1: Calculate the total value of the collateral:
C=5 ETH×2000=10,000C = 5 \text{ ETH} \times 2000 = 10,000C=5 ETH×2000=10,000
Step 2: Apply the LTV to determine the maximum loan amount:
Max Loan Capacity=10,000×0.8=8,000\text{Max Loan Capacity} = 10,000 \times 0.8 = 8,000Max Loan Capacity=10,000×0.8=8,000
Since you borrowed $10,000, your debt (D) is already higher than the max capacity, which means your liquidation price will be higher.
Step 3: Calculate the liquidation price:
LP=10,0005×0.8=10,0004=2,500L_P = \frac{10,000}{5 \times 0.8} = \frac{10,000}{4} = 2,500LP=5×0.810,000=410,000=2,500
Your Liquidation Price is $2,500 per ETH.
If ETH’s market price drops to $2,500, your collateral will be liquidated.
Factors Affecting Liquidation Price:
Borrowed Amount (D): Higher debt increases the liquidation price.
Collateral Amount (C): More collateral lowers the liquidation price.
LTV Ratio: Higher LTV means a higher liquidation risk.
How to Lower Liquidation Risk:
Increase Collateral: Deposit more ETH or other accepted assets.
Repay Part of the Loan: Reduce the debt amount to lower your LTV.
Collateral Swap: Choose a collateral with a higher liquidation threshold.
Would you like me to create an interactive calculator that can quickly compute the liquidation price for Aave based on your input values? This would make it super easy to understand your risk level instantly.
