Kamino Finance, a leading DeFi protocol on Solana, just rolled out some game-changing updates to their soft liquidation system. In a recent announcement on X, the team revealed a massive 90% reduction in liquidation penalties, now starting as low as 0.1%. Plus, user positions can now unwind in smaller increments of just 10%. This move aims to make borrowing on Solana smoother and less punishing, especially in the wild swings we see with assets like meme tokens.

For those new to DeFi, liquidation happens when your borrowed position falls below a certain collateral threshold due to price drops. In traditional setups like Aave, this can mean hefty penalties and full position closures. Kamino's "soft" approach is different—it gradually unwinds your position to avoid total wipeouts.

But the real meat comes from Marius, co-founder of Kamino (known as @y2kappa on X), who dove deep into the nuances of partial liquidations in a follow-up thread. He challenges the idea that tiny, minimal liquidations are always the best. Instead, he explains it's all "path dependent"—meaning it depends on how the market moves after the liquidation kicks in.

Take a look at the chart Marius shared. On the left, with a tiny close factor of 0.1% (think "many small cuts"), your collateral value drops steadily as the market falls, crossing the liquidation threshold multiple times. You end up selling bits of your assets lower and lower. On the right, a larger 10% close factor acts like "one decisive cut"—you sell a bigger chunk earlier at a higher price, potentially saving more if the dip continues.

Here's the key takeaway: If prices keep tanking, bigger partial liquidations (like 10%) are better because you offload more collateral at better prices upfront. But if the market bounces back quick, smaller ones win since you haven't sold off too much on the cheap. The problem? You can't predict the future. Crypto markets, especially for volatile meme coins on Solana, can flip in an instant.

Marius warns against extremes. Too small a close factor risks "death by a thousand cuts," where you're constantly liquidating tiny amounts as prices slide, eroding your position. Too large, and a quick rebound could leave you over-liquidated. Kamino settled on 10% for most markets as a sweet spot—balancing borrower protection with lender security and overall protocol health.

This update is huge for anyone leveraging meme tokens or other high-vol assets on Solana. Lower penalties mean less pain during downturns, encouraging more participation in DeFi. It also highlights why protocols like Kamino are iterating fast to handle Solana's speedy, low-cost environment.

In the replies, folks like Chris Hermida from Switchboard echoed the balancing act between user experience and systemic risk. Others asked for tools to monitor liquidations better—hinting at features Kamino might add soon.

If you're diving into Solana DeFi, check out Kamino at kamino.finance to see these changes in action. It's moves like this that keep the ecosystem evolving, making it safer for borrowers chasing those meme token gains without getting rekt too hard.