Liquidations
Overview
Liquidation is a core risk-management mechanism within the Horizon protocol. Its purpose is to protect lenders by ensuring that all borrowing positions remain sufficiently collateralized at all times.
Horizon inherits Morpho’s liquidation framework, which is designed to:
Prevent bad debt under normal market conditions
Incentivize rapid third-party liquidation of unhealthy positions
Minimize borrower losses through optional pre-liquidation mechanisms
Morpho supports two complementary liquidation paths:
Standard Liquidation — the default, protocol-level mechanism
Pre-Liquidation (Auto-Deleverage) — an optional, borrower-enabled safety layer
Loan-To-Value (LTV)
Definition
The Loan-To-Value (LTV) ratio measures the size of a borrower’s debt relative to the value of their posted collateral.
Where collateral value is computed using the market’s oracle price.
Collateral Valuation
Oracle prices are normalized using a fixed scaling factor.
All liquidation checks rely exclusively on oracle prices defined for the market.
Liquidation Loan-To-Value (LLTV)
Each borrow market defines a Liquidation Loan-To-Value (LLTV) threshold.
Positions are safe when:
Positions become liquidatable when:
LLTV values are market-specific and determined by asset risk, volatility, and liquidity considerations.
Health Factor
The Health Factor provides a normalized measure of position safety.
Health Factor > 1.0 → Position is healthy
Health Factor ≤ 1.0 → Position is eligible for liquidation
Standard Liquidation
When Standard Liquidation Occurs
A position becomes eligible for standard liquidation when its LTV exceeds the market’s LLTV due to:
Collateral price decline
Interest accrual on debt
A combination of both
Standard Liquidation Mechanics
When a position is liquidatable:
Any external actor (“liquidator”) may repay part or all of the borrower’s debt
In exchange, the liquidator receives collateral worth:
The entire incentive is paid to the liquidator. The protocol does not charge a liquidation fee.
Liquidation Incentive Factor (LIF)
The LIF determines the liquidation bonus and is derived from the market’s LLTV:
Where:
(maximum incentive cap)
For example, a market with an 86% LLTV yields an LIF of approximately 1.05, or a 5% liquidation bonus.
Key Properties of Standard Liquidation
Trigger: LTV ≥ LLTV
Debt Coverage: Up to 100% in a single transaction
Execution: Permissionless, first-come-first-served
Borrower Impact: Potentially large, one-time position loss
Implementation: Built directly into Morpho core contracts
Pre-Liquidation (Auto-Deleverage)
Overview
Pre-liquidation is an optional, opt-in mechanism that allows borrowers to reduce liquidation risk by enabling gradual, partial deleveraging before reaching the LLTV threshold.
This creates a buffer zone between healthy positions and full liquidation.
Pre-Liquidation Zone
For a given market:
Safe Zone:
Pre-Liquidation Zone:
Standard Liquidation Zone:
Pre-Liquidation Mechanics
Within the pre-liquidation zone:
Liquidators may repay only a portion of the borrower’s debt
The maximum repayable amount is controlled by the Pre-Liquidation Close Factor (preLCF)
The liquidation incentive is defined by the Pre-Liquidation Incentive Factor (preLIF)
Both parameters scale dynamically as LTV approaches LLTV.
Key Parameters
preLLTV — threshold where pre-liquidation begins
preLCF₁ / preLCF₂ — minimum and maximum close factors
preLIF₁ / preLIF₂ — minimum and maximum incentive factors
Pre-Liquidation Oracle — oracle used for trigger evaluation
Effects of Pre-Liquidation
Reduces debt incrementally
Restores the position closer to a healthy LTV
Minimizes borrower losses during volatile markets
Preserves position continuity where possible
Key Properties of Pre-Liquidation
Opt-in: Must be enabled by the borrower
Position Closure: Partial, limited per event
Borrower Impact: Smaller, incremental losses
Liquidator Incentives: Lower than standard liquidation
Implementation: External pre-liquidation contract
Bad Debt Considerations
Horizon inherits Morpho’s vault-level bad debt handling behaviour.
MetaMorpho V1.0 Vaults
Bad debt is realized immediately
Losses are socialized proportionally among lenders
Markets remain usable indefinitely
MetaMorpho V1.1 Vaults
Bad debt is not realized automatically
Debt remains in the market until resolved
Vault versioning and risk parameters are disclosed per market.
Liquidation Characteristics
Horizon uses Morpho’s liquidation engine and adds mechanisms to capture additional value for vault depositors and the protocol.
Oracle-Driven (Morpho Base): Liquidations are triggered when oracle prices indicate a position has fallen below its required collateral ratio.
Permissionless (Morpho Base): Anyone may liquidate an unhealthy position. No privileged actors are required.
Fixed-Price Execution (Morpho Base): Collateral is liquidated at the oracle price with predefined incentives. The protocol does not run collateral auctions.
Partial Liquidations (Morpho Base): Only the portion of debt required to restore solvency must be liquidated.
Liquidation Fee (Horizon Extension): Horizon applies a protocol-defined liquidation fee on each liquidation. This fee is distributed between the associated Earn Vault, the Horizon buy and burn mechanism, and the protocol treasury.
Oracle Extractable Value (OEV) Capture (Horizon Extension): Horizon captures the value generated from oracle updates that enable liquidations. Resulting proceeds are distributed between Earn Vault depositors, the Horizon buy and burn mechanism, and the protocol treasury.
Resulting Model: Liquidations continue to secure the system while also generating protocol revenue and increasing vault yield.
Summary
Horizon’s liquidation system prioritizes lender protection while offering borrowers optional tools to manage risk proactively.
Standard Liquidation ensures system solvency
Pre-Liquidation reduces borrower losses and volatility impact
Incentive-aligned liquidators secure protocol health
Together, these mechanisms create a resilient, market-driven liquidation framework aligned with Horizon’s long-term sustainability.
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