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A liquidation is a protective mechanism used in lending protocols and leveraged strategies to ensure borrowed funds remain collateralized. If you borrow against collateral and the collateral value falls too far relative to the debt, the protocol can sell part or all of your collateral to repay the debt, often charging a liquidation penalty. Liquidations are most common during sharp market moves or when positions are overleveraged. You reduce liquidation risk by maintaining conservative collateral ratios, monitoring your health factor, and adding collateral or reducing debt when market conditions worsen.