Margin call and liquidation mechanics in crypto-collateral lending
Margin call and liquidation mechanics in crypto-collateral lending
A margin call and a liquidation are two points on the same timeline, and the distance between them is where a borrower either saves a position or loses it. Understanding both, and the buffer that separates them, is the difference between managing a collateralized loan and getting surprised by one.
How it works
A collateralized loan carries a health factor: a running measure of how much cushion sits between the current collateral value and the point of liquidation. As collateral price falls or the loan balance grows with accrued interest, the health factor deteriorates toward the threshold.
A margin call is a warning, issued before the liquidation threshold is breached, that a position is approaching danger and needs more collateral or a partial repayment to restore its cushion. In traditional finance and in some institutional crypto arrangements, a margin call comes with a grace period: hours or days to add collateral before the lender acts. In fully on-chain, permissionless lending, there's often no explicit margin call at all, the borrower is simply expected to monitor their own position, and the first "notice" of trouble can be the liquidation itself.
Liquidation is the enforcement action: once the position crosses its liquidation threshold, collateral is seized and sold to repay the loan, typically by keepers who earn a liquidation bonus for executing it. The mechanics are automatic and, on-chain, near-instant. There's no negotiation, no workout, no discretion; the code executes the moment the threshold is crossed.
The buffer between the margin-call zone and the liquidation threshold is what gives a borrower room to act. A wider buffer means more time and more warning to add collateral before liquidation becomes possible. A narrow buffer, or none, means a sharp price move can take a position from healthy to liquidated with no practical opportunity to intervene.
Why it matters
The presence or absence of a real margin-call window is one of the most important, and most overlooked, differences between institutional and retail crypto lending. A structure that provides genuine advance warning and a grace period lets a sophisticated borrower manage collateral actively, treating a margin call as a routine operational event rather than a catastrophe. A structure with no warning turns every sharp market move into a potential surprise liquidation.
For lenders, the same buffer is a risk-management tool in the other direction. Setting the margin-call and liquidation thresholds conservatively, with real space between them and the origination LTV, reduces the chance that a fast market move outruns the liquidation machinery and leaves the loan undercollateralized, which is the scenario that produces actual bad debt.
Where this shows up in Rekord
Rekord's institutional lending arrangements build in a real buffer between origination, margin-call, and liquidation levels, so that borrowers have operational room to manage collateral rather than facing surprise liquidations. For how those thresholds are defined, see LTV vs LLTV: origination threshold vs liquidation trigger.