💧Liquidations

Introduction

Liquidation is the process that occurs when the Health Factor of a borrower is reduced to 1 or lower. This happens when the collateral decreases in value or the borrowed debt increases in value against each other. This collateral vs loan to value ratio is show in the Health Factor.

In a liquidation, up to 50% of the borrower's debt is repaid and that value + liquidation fee is taken from the collateral available, so after a liquidation that amount liquidated from your debt is repaid.

Liquidation Threshold

The liquidation threshold is a defined point, expressed as a percentage, where the loan becomes undercollateralized. If a Liquidation threshold is set to 80% this would mean that if the value of the loan rises above 80% of the collateral, the loan would then be defined as undercollateralized and could be liquidated.

The delta between LTV and the Liquidation Threshold is the safety net for borrowers.

For each wallet the Liquidation Threshold is calculate as the weighted average of the Liquidation Thresholds of the collateral assets and their value:

$Liquidation \: Threshold= \frac{ \sum{Collateral_i \: in \: ETH \: \times \: Liquidation \: Threshold_i}}{Total \: Collateral \: in \: ETH \:}$

Liquidation Bonus

In the event of a liquidation, there is a bonus on the price of collateral assets purchased by liquidators.

How much is the liquidation penalty?

The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral. You can find every assets' liquidation fee in the risk parameters section.

Can you give me an example?

Sure! A couple of them here:

Example 1 Bob deposits 10 ETH and borrows 5 ETH worth of USDB. If Bob’s Health Factor drops below 1 his loan will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of USDB. In return, the liquidator can claim a single collateral which is ETH (5% bonus). The liquidator claims 2.5 + 0.125 ETH for repaying 2.5 ETH worth of USDB.

Example 2 Bob deposits 5 ETH and 4 ETH worth of YFI, and borrows 5 ETH worth of USDB. If Bob’s Health Factor drops below 1 his loan will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of USDB. In return, the liquidator can claim a single collateral, as the liquidation bonus is higher for YFI (15%) than ETH (5%) the liquidator chooses to claim YFI. The liquidator claims 2.5 + 0.375 ETH worth of YFI for repaying 2.5 ETH worth of USDB.

How can I avoid getting liquidated?

To avoid liquidation you can raise your health factor by depositing more collateral assets or repaying part of your loan. By default, repayments increase your health factor more than deposits. Also, it's important to monitor your health factor and keep it high to avoid a liquidation. Keeping your health factor over 2, for example, gives you more of a margin to avoid a liquidation.

You should be mindful of the stablecoin price fluctuations due to market conditions and how it might affect your healthfactor. For example, the market price of USDB 1.00 might not equal exactly USD 1.00, but for example USD 0.95. The price fluctuations of stablecoins, like any assets, affects your healthfactor.

Can I participate in the liquidations ecosystem?

Yes, liquidations are open to anyone, but there is a lot of competition. Normally liquidators develop their own solutions and bots to be the first ones liquidating loans to get the liquidation bonus.