Liquidation

Liquidation occurs when the price of the collateral has fallen below the conversion range while your loan health is negative. This happens because it has become impossible for the protocol to manage the loan as the collateral does not cover the loan past that point, and has to automatically close it. This means that even if the price of the collateral goes back up in the future, the Automated Loan Protection will not be able to buy back the collateral for you as it isn't holding your funds anymore.

Liquidation means the collateral you deposited to create the loan has been "liquidated" - it has been sold to cover the loan for you. This means you no longer have access to the collateral you deposited. You still own the $MONEY you borrowed and no longer need to pay back the loan, as it has been settled. But it is not possible to repay the loan at this point to get the collateral back.

Mechanically, the liquidation is typically done by a special group of users referred to as searchers or bots, but anyone can do it. When the protocol detects that loans, or specifically bands, are eligible for conversion, anyone can claim that collateral for a certain exchange rate defined by the band. They are incentivized to do this conversion because they usually make a small profit from doing those trading transactions due to a discount that the protocol provides, at the cost of the user who set the loan up. This is why it is advised that users try to avoid getting liquidated as that discount is set at 10% currently.

How do you prevent liquidation?

As with preventing entering the Collateral conversion mode, it is of course impossible to predict the price of a publicly traded asset that in this case is used as collateral, and through that prevent getting liquidated. But as a user there are still ways for you to avoid getting liquidated, which is by being proactive anytime the price of your collateral drops significantly towards the conversion range, and actively repaying your loan if you have entered the Collateral conversion mode. The conversion range can be lowered if more collateral is added to the loan, or the loan is partially repaid, or both. Doing any of those actions will put you further from entering the mode and incurring trading fees. And repaying the loan while in the conversion mode will put you further away from liquidation.