Technical Definition

Liquidation Bonus

A liquidation bonus is the discount or extra collateral value awarded to liquidators for repaying risky debt positions.

By Crypto University Editorial
DeFiSmart ContractLiquidity

✦ Key Insight

Understanding Liquidation Bonus helps users evaluate DeFi yield, leverage, liquidity, borrowing risk, and protocol incentives without relying only on headline APY or token rewards.

✕ Common Misconceptions

Do not assume Liquidation Bonus works the same across protocols. Check contract design, liquidation rules, oracle dependencies, fees, and smart-contract risk before committing funds.

Detailed Explanation

A liquidation bonus is the discount or extra collateral value awarded to liquidators for repaying risky debt positions. It is part of the smart-contract and economic mechanisms DeFi protocols use to manage liquidity, credit, incentives, or risk.

In Practice

“A DeFi user encounters Liquidation Bonus while supplying liquidity, borrowing against collateral, using a vault, or reviewing protocol risk settings.”

Dig Deeper

Smart Contract

A smart contract is blockchain-deployed code that can hold state and execute predefined rules when called.

DeFi

Short for “Decentralized Finance,” it refers to financial applications built on blockchain networks that operate without traditional intermediaries.

Liquidity

Liquidity describes how easily an asset can be bought or sold in meaningful size without causing a large change in price.

Yield Farming

Moving capital between DeFi protocols to earn the highest available rewards, usually paid in a protocol's own token.

Collateral

Assets you lock up to secure a loan or a leveraged position, which can be seized if the position falls below its required threshold.