A Liquidation Penalty is a value a borrower has to pay when their collateral falls below the minimum collateral level.

In the context of crypto and decentralized finance (DeFi), liquidation penalties are often charged by lending protocols when a borrower is unable to repay their loan or maintain the required level of collateral.

For example, if a user takes out a loan on a DeFi lending platform and their collateral falls below the required level, the platform may automatically sell the collateral to repay the loan and cover any outstanding interest or fees. The user may be charged a liquidation penalty in addition to any other fees or charges associated with the loan.

Overall, liquidation penalties are a common feature of DeFi lending protocols and are used to protect the platform and other users from the risks associated with defaulting on a loan. Users should carefully consider the potential for liquidation penalties when taking out a loan on a DeFi platform and ensure that they are able to meet the terms of their loan.

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