Full liquidations excel at simplicity and finality because they clear an entire undercollateralized position in a single transaction. This approach, used by early protocols like MakerDAO, minimizes protocol risk by immediately eliminating bad debt and simplifies the keeper ecosystem. However, it can be overly punitive for borrowers, as seen in volatile markets where a 1% price dip can trigger a 100% loss of collateral, leading to poor user experience and systemic risks during market crashes.
LABS
Comparisons
Partial Liquidations vs Full Liquidations
A technical comparison of incremental deleveraging versus complete position closure for crypto-backed stablecoin protocols. Analyzes capital efficiency, user risk, and systemic stability trade-offs for CTOs and protocol architects.
Chainscore © 2026
introduction
THE ANALYSIS
Introduction: The Core Trade-off in DeFi Risk Management
Understanding the fundamental choice between partial and full liquidation mechanisms is critical for designing resilient lending protocols.
Partial liquidations take a different approach by gradually deleveraging a position. Protocols like Aave and Compound use this strategy, liquidating only enough collateral to return the loan to a safe health factor (e.g., above 1.0). This results in a key trade-off: it preserves borrower equity and reduces market impact from large, single sales, but introduces complexity in keeper logic and can leave protocols exposed to rapidly deteriorating positions if liquidations cannot keep pace with price declines.
The key trade-off: If your priority is maximizing protocol safety and simplicity in a volatile environment, the definitive nature of full liquidations is preferable. If you prioritize user retention, reduced market volatility, and a more forgiving system, choose a partial liquidation model. The choice fundamentally dictates your protocol's risk appetite, keeper economics, and long-term user base composition.
tldr-summary
Partial vs. Full Liquidations
TL;DR: Key Differentiators at a Glance
A direct comparison of the two primary liquidation mechanisms, highlighting their core operational and financial trade-offs.
01
Partial Liquidation: Capital Efficiency
Specific advantage: Liquidates only the minimum required collateral to restore a position's health. This preserves the user's remaining collateral and leverage, avoiding a complete account wipeout. This matters for highly volatile markets where a user wants to maintain exposure.
02
Partial Liquidation: Reduced Penalty Impact
Specific advantage: The liquidation penalty (e.g., 5-15%) is applied only to the portion of debt repaid, not the entire position. This results in a smaller, more manageable loss for the borrower. This matters for large positions where a full liquidation fee would be catastrophic.
03
Full Liquidation: Simplicity & Finality
Specific advantage: Completely closes the undercollateralized position in one atomic transaction. Eliminates the risk of a "death spiral" from repeated partial liquidations in a crashing market. This matters for protocols prioritizing operational simplicity and final risk closure.
04
Full Liquidation: Guaranteed Solvency
Specific advantage: Ensures the bad debt is 100% cleared immediately, protecting the protocol's solvency with certainty. This matters for stablecoin protocols (like MakerDAO's early design) where system stability is the paramount concern.
HEAD-TO-HEAD COMPARISON
Feature Comparison: Partial vs Full Liquidations
Direct comparison of key metrics and features for DeFi liquidation mechanisms.
| Metric | Partial Liquidations | Full Liquidations |
|---|---|---|
Capital Efficiency | High (repays only necessary debt) | Low (closes entire position) |
User Recovery Likelihood |
| < 20% (position is closed) |
Liquidator Profit (Avg. % of debt) | 0.5% - 2% | 5% - 10% |
Protocol Risk (Bad Debt Accumulation) | Reduced by ~40% | Standard |
Implementation Complexity | High (requires oracle precision) | Low (standard auction) |
Supported by Aave, Compound | ||
Supported by MakerDAO |
pros-cons-a
STRATEGIC TRADE-OFFS
Pros and Cons: Partial Liquidations
Key strengths and trade-offs at a glance. The choice impacts capital efficiency, user experience, and protocol risk.
01
Partial Liquidations: Capital Preservation
Specific advantage: Liquidates only the minimum collateral needed to restore a safe health factor (e.g., from 1.0 to 1.1). This matters for leveraged yield farmers and long-term holders who want to maintain their position size and avoid the full cost of repaying debt.
02
Partial Liquidations: Better UX
Specific advantage: Reduces user churn by allowing positions to survive market dips. Protocols like Aave and Compound use this to improve retention. This matters for protocols prioritizing TVL growth and retail users who may not actively monitor positions hourly.
03
Full Liquidations: Simpler & Cheaper Logic
Specific advantage: Single, atomic transaction clears the entire position. This reduces smart contract complexity and gas costs for the liquidator. This matters for newer L1/L2 protocols building minimal viable products and keepers optimizing for profit margins.
04
Full Liquidations: Faster Risk Clearance
Specific advantage: Immediately eliminates undercollateralized debt from the protocol's balance sheet. This matters during black swan events or high volatility where partial liquidations may not keep pace with price declines, potentially threatening system solvency.
pros-cons-b
PARTIAL VS. FULL LIQUIDATIONS
Pros and Cons: Full Liquidations
A critical design choice for lending protocols. Partial liquidations offer user protection, while full liquidations prioritize protocol safety and simplicity.
01
Partial Liquidations: Key Strength
Reduces user impact: Liquidates only the minimum collateral needed to restore health, preserving user capital. This is crucial for high-value positions (e.g., whale wallets, institutional vaults) where a full wipeout is catastrophic. Protocols like Aave and Compound use this model.
02
Partial Liquidations: Key Weakness
Increases protocol risk exposure: The position remains open and can be immediately re-liquidated if the price continues to drop, creating a cascading liquidation risk. This requires more sophisticated and expensive keeper bot logic to manage, increasing operational overhead.
03
Full Liquidations: Key Strength
Maximizes protocol safety: Closes the unhealthy position entirely, immediately removing all debt and collateral from the system. This is optimal for volatile or long-tail assets where price oracles may lag, as it provides a definitive resolution. Used by MakerDAO and many early DeFi protocols.
04
Full Liquidations: Key Weakness
Creates user experience friction: The 'all-or-nothing' nature can lead to total capital loss from a small price dip, discouraging borrowing. This is a major drawback for retail users or leveraged yield strategies where positions are frequently near the liquidation threshold.
CHOOSE YOUR PRIORITY
When to Choose: A Decision Framework by User Persona
Full Liquidations for Risk Managers
Verdict: The standard for maximum risk reduction and capital efficiency. Strengths: Full liquidation of a position (e.g., on Aave, Compound) immediately clears all bad debt, protecting the protocol's solvency. It provides a clean slate for the borrower and a clear, one-time auction for liquidators. This model is battle-tested and preferred for over-collateralized lending protocols where maintaining a pristine balance sheet is paramount. Key Metric: 100% Debt Clearance ensures no residual risk remains on the protocol's books.
Partial Liquidations for Risk Managers
Verdict: A sophisticated tool for managing volatility and reducing borrower attrition. Strengths: Protocols like MakerDAO use partial liquidations to incrementally reduce a position's risk (e.g., liquidating just enough collateral to return the Loan-to-Value ratio to a safe threshold). This minimizes the shock to borrowers during market dips, preserving user capital and protocol TVL. It's a more nuanced approach that requires robust oracle and auction mechanisms. Key Metric: Position Health Recovery without total account wipeout.
verdict
THE ANALYSIS
Verdict and Strategic Recommendation
Choosing between partial and full liquidation mechanisms depends on your protocol's tolerance for risk, complexity, and capital efficiency.
Partial Liquidations excel at preserving user positions and reducing systemic risk by allowing borrowers to repay only the undercollateralized portion of their loan. This approach, pioneered by protocols like MakerDAO and Aave, minimizes capital destruction and user churn. For example, during the March 2020 crash, Maker's partial liquidation mechanism helped stabilize the system by preventing the total wipeout of large vaults, though it contributed to the infamous $8 million DAI debt auction due to accumulated bad debt.
Full Liquidations take a different, zero-tolerance approach by closing an entire position once it breaches the liquidation threshold. This strategy, used by platforms like Compound and many early DeFi lending markets, results in a simpler, more decisive risk management model. The trade-off is higher user friction and potential for greater capital inefficiency, as a position only 1% undercollateralized is treated the same as one that is 50% undercollateralized, leading to a complete loss of the borrower's collateral.
The key trade-off: If your priority is user retention, capital efficiency, and managing tail-risk during high volatility, choose a Partial Liquidation model. It's better suited for blue-chip collateral and protocols targeting mainstream adoption. If you prioritize simplicity of implementation, guaranteed solvency, and minimizing protocol-side complexity, choose Full Liquidations. This model is often more appropriate for newer protocols or those dealing with highly volatile, long-tail assets where precise partial repayment calculations are riskier.
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