A liquidation occurs when the health factor of a borrower drops below a particular threshold (health factor value of "1"), or when your borrow limit reaches 100% -- due to the collateral being unable to cover their loan/debt value. The user's health factor is determined by your collateral vs loan value. When your collateral decreases in value, or the borrowed debt increases in value, this will influence your score.
When a liquidation occurs, up to 60% of the borrower's debt is used to repay the loan. That value (50% Close Factor + 10% Liquidation Incentive), is taken from the available collateral. After a liquidation, the amount liquidated from the debt is repaid.
Liquidation can be avoided by routinely monitoring the health factor, and ensuring it is as high as possible. If the health factor is lower, a user can avoid liquidation by raising the health factor. This includes depositing more collateral, or paying part of the loan. Repayments will typically increase health factor more than additional deposits. Users must also routinely monitor the health factor to avoid liquidation.
Liquidation mining is highly competitive, but available to anyone who wishes to participate.
Liquidators are a vital part of the borrow and lending ecosystem. Liquidators protect depositors and help offset loan defaults on borrowers. This is accomplished by turning the discounted collateral into a loan.
Liquidation events are triggered by the health factor declining below the threshold. Repaying the loan, or depositing more assets, can increase your health factor. Repaying the loan will improve the health factor value greater than depositing more assets.