Real Madrid are still favorites in the Champions League even though their performance this season is not very good. I know Real Madrid is a good team to hope to come back and improve their performance, so things will change so quickly for them. Real Madrid has lost 6 points from 4 matches, while they still have 4 matches that they can all win. The match against Liverpool is certainly very tough, but that doesn't mean Real Madrid will fail to win it.
I don't think Real Madrid is still one of the favorite teams in UCL this season. Real Madrid performance looks very unconvincingly, they don't play consistently as the last season. Both in UCL and La Liga, Real Madrid gets unexpected results. Real Madrid got few bad results recently, they were even defeated with 4 goals by Barcelona. Now, when they will play against Liverpool, I'm not sure Real Madrid can win the match. Liverpool experiences great season, they are unbeaten in UCL so far.
If in the end Real Madrid loses this match, it will be their third defeat this season in the Champions League. Everything was getting heavier and more chaotic, but I didn't expect the defeat to become a reality.
Even if Real Madrid can win the match, it doesn't increase the chance of Real Madrid to win UCL title. But if Real Madrid can win the match, they can improve their position in UCL table. It will be worse if Real Madrid gets a lose, Real Madrid probably becomes harder to reach the next round. Honestly, I don't expect to see Real Madrid eliminated very early.