Liquidation
A static liquidation model struggles to address the many ways market conditions, asset profiles, and user behaviors can vary. By contrast, our dynamic mechanism adjusts parameters based on actual risk levels, ensuring that liquidations stay efficient and protective across a wide spectrum of scenarios.
Understanding Parameters
There are four essential parameters to consider for asset-specific risk control during liquidation:
Max Loan-to-Value Ratio (Max LTV): The maximum percentage of collateral value that borrowers can access. For example, if your collateral is worth $100 and the Max LTV is 70%, you can borrow up to $70. It’s the starting point for how much leverage you can take.
Liquidation Threshold (LT): The LTV level—between the Max LTV and 100%—at which liquidation is triggered.
Close Factor (CF): The percentage of debt that must be repaid during liquidation when the LTV reaches or exceeds the LT.
Liquidation Bonus (LB): The percentage of the collateral’s value that is awarded to the liquidator during liquidation when the LTV is at or above the LT.
Dual Liquidation Thresholds
Unlike traditional liquidation approaches with a single trigger, we define two separate Liquidation Thresholds:
LT1 (Lower Threshold):
An earlier alert level. When your LTV crosses LT1, the liquidation process can start, but the risk is still considered moderate.
LT2 (Higher Threshold):
A more critical point is nearer 100%. If your LTV reaches or exceeds LT2, the situation is viewed as higher risk, prompting stronger corrective measures.
Within this LT1 ↔ LT2 zone, two key parameters change gradually rather than jumping abruptly:
Close Factor (CF):
CF can increase or stay constant from its LT1 value to its LT2 value. Near LT1, a smaller portion of your outstanding debt might be repaid (e.g., 20%), whereas nearer LT2, that portion could scale higher (e.g., 100%).
Liquidation Bonus (LB):
LB increase or stay constant from its LT1 value to its LT2 value.
Position Closure vs Actual Loss
Liquidation amount, or close factor doesn’t always equate to a large loss. The real cost to the borrower mostly depends on the Liquidation Bonus, not the portion of debt repaid:
Liquidation Process:
A liquidator repays part of your debt (as determined by CF) and receives some of your collateral (tied to LB).
Borrower’s Actual Loss:
The main out-of-pocket loss corresponds to whatever portion of collateral is taken to cover the LB. Even if CF is high, a more moderate LB may limit the overall collateral taken.
Example
Collateral: $100
Debt: $90
LT1 → LT2: 90% → 98%
CF at LT1: 20%
LB at LT1: 10%
As your LTV touches LT1, 90%, Liquidation begins. With a CF of 20% at LT1, $90 x 20% = $18 will be liquidated. While $18 of your position is closed, your net loss is $18 x 10% = $1.8—the LB amount.
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