What is the difference between the Liquidation threshold and the minimum collateral ratio? Why have two numbers?
Many beginners confuse these, but they're different concepts. The Minimum CR is the threshold you must meet to open a position — e.g. Sky's ETH vault requires at least 150% CR to mint USDS. The Liquidation Threshold is the trigger below which you're force-closed — e.g. 130%. The 20 percentage points between them (150% to 130%) is the safety buffer: ETH can drop roughly 13% before CR falls from 150% to 130%, giving you time in that window to add collateral or repay. Why design them separately? If the minimum opening threshold equaled the liquidation threshold, any small drop would trigger immediate liquidation — no buffer, extremely fragile system.
What is a Keeper Bot and can I run one myself?
A Keeper Bot is a script that automatically scans on-chain state and executes liquidations the moment it finds a position below the Liquidation threshold. DeFi is designed so anyone can be a liquidator: you run a script that monitors Sky, Aave, Compound, etc., and the moment a qualifying position appears, it calls the protocol's liquidation function. On success, you earn the liquidation penalty (e.g. Sky's 13%, Aave's 5-10%) — liquidating a $1,000 collateral position earns you $100-130. But it's not easy money: competition is fierce, usually from pros with flash loans, MEV tools, and low-latency infrastructure. For most people, understanding liquidation mechanics is about knowing what happens if your position gets liquidated and how to avoid it — not about becoming a liquidator yourself.
After Liquidation, where does my money go? Is it all gone?
Not all gone, but you lose the liquidation penalty. The liquidation process: the system sells enough collateral to cover 'your Stablecoin debt plus the liquidation penalty' and returns the remaining collateral to your address. Example: you locked $150 ETH to borrow 100 USDS, then ETH drops to hit the liquidation threshold. The system sells ~$113 of ETH (repaying 100 USDS + 13% penalty = $13), and the remaining ETH (market value ~$37) comes back to you. You keep the 100 USDS you borrowed but lost $150 in ETH collateral and got back only $37 — net loss $13, which is the liquidation penalty. This surprises many people who assume 'my collateral is still there,' but in liquidation you're using collateral to pay a forced 13% fee.
Advanced: what is flash Liquidation and why do liquidators use flash loans?
Flash liquidation integrates Flash Loans into the liquidation process so liquidators can execute without holding any capital. The flow: borrow a flash loan (instant uncollateralized) → repay the position's Stablecoin debt with the borrowed USDC/USDT → system releases the ETH collateral to the liquidator → sell the ETH on market → repay the flash loan principal → keep the liquidation penalty as profit. All within one transaction; any step's failure rolls back everything. Benefits for liquidators: no need to hold large capital; benefits for protocols: more participants can liquidate, reducing bad-debt risk. This is why Keeper Bot competition is so fierce — anyone can run million-dollar liquidations via flash loan with near-zero capital, only technical barriers.
You open a vault on Sky, locking 0.05 ETH (ETH=$3,000, so $150) and minting 100 USDS. CR = 150%. Three weeks later ETH drops to $2,250; your 0.05 ETH is now worth $112.50. CR = 112.5% — below the 130% threshold. A Keeper Bot triggers: sells your 0.05 ETH for $112.50, repays the 100 USDS debt, takes a $13 penalty, returning near zero ETH to you. You keep the 100 USDS borrowed but net lost $50 vs your original $150 ETH. Lesson: maintain CR well above the liquidation threshold (target ≥ 200%) or set alerts to top up when CR approaches 150%.
Liquidation is perfect design for protocols: it ensures that no matter how hard the market crashes, USDS's $1 always has real-asset backing and the protocol accumulates no bad debt. But for the borrower being liquidated, it means 'forced to sell my ETH at its lowest price' — exactly when your ETH position's loss is greatest. Plus, the liquidation penalty (5-15%) makes your loss worse than voluntary repayment. The fairness of this design has always been debated, but from a system-stability standpoint it's necessary. The best response: keep more buffer above the liquidation threshold, set monitoring alerts, and proactively add collateral or repay early in a price decline rather than waiting for passive liquidation.
Missing Link: The liquidation penalty (13%) looks like a punishment but is actually the 'market wage' that keeps the DeFi system functioning — without this profit incentive, nobody would run Keeper Bots, and the system couldn't automatically clear bad debt during a market crash. Retail investors hate liquidation penalties but don't realize that exact payment is what keeps their stablecoin at $1.