A Liquidation in the Maker Protocol is the compulsory sale of collateral to cover a user’s borrowed Dai position, when the Vault Collateralization Ratio falls below the minimum Liquidation ratio required.
Each token accepted as collateral in Oasis has its own Liquidation ratio, which can be consulted here. If the Collateralization Ratio for a position falls below the minimum requirement, it will trigger the liquidation process.
In the liquidation process, Vault collateral can be sold through an auction in order to cover the outstanding Dai position. If the debt, including the Stability Fee, and the liquidation penalty are fully repaid with the proceedings from the liquidation, any remaining collateral will be made available for withdrawal. In Oasis Borrow, a Vault owner will see a notification to reclaim any collateral that is left over from a liquidation. This will go back to their Vault.
Liquidation example: the current minimum collateralization ratio for an ETH-A Vault is 150%. Suppose a user has deposited $ 1,500 worth of Ethereum as collateral on Oasis, and generated 750 Dai. So, the initial collateralization ratio is 200% ($ 1,500/750). If the price of ETH falls or the debt increases due to accrued stability fee and the collateralization ratio falls below the minimum 150% threshold, then the Vault can be liquidated.