☎️Liquidations
Last updated
Last updated
There are two ways a borrower can be liquidated, collateral ratio and payment timing.
Collateral Ratio
A loan is at risk of liquidation when the value of the provided collateral drops below the required minimum collateral.
As a reminder, the breakdown of the collateral requirements is as follows based on a $10,000 loan:
| Loan value | Collateral requirements |
|---|---|
$10,000 | 100% core collateral |
$2,000 | 20% liquidation collateral |
$1,000 | 10% collateral buffer |
Total $13,000, allowing a borrower to borrow up to $10,000.
With the above figures in mind, the borrower’s collateral is at risk if the value dips below the 120% threshold. We would recommend always keeping at least a 10% buffer to allow for market fluctuations. There is no limit to how much buffer you decide to add. This will depend on your available resources and risk tolerance.
When an under collaterised loan is liquidated, the borrower loses their provided collateral. The initially borrowed assets however, remain in the borrower’s ownership.
With above figures, were your collateral to dip below 120% or $12,000, this is what you would lose, but you would still have the $10,000 you borrowed.
The collateral asset that is liquidated, is distributed as follows: Lender first receives the full amount of their outstanding loan.
Then the remaining collateral balance is split:
| Interested parties | % of split |
|---|---|
Liquidator | 25% of the collateral balance |
Stakers | 25% of the collateral balance |
Protocol | 25% of the collateral balance |
Lender | 25% of the collateral balance |
As in the above scenario, $12,000 is liquidated. $10,000 goes back to the lender.
The remaining $2,000 is split.
| Interested parties | Value of split |
|---|---|
Liquidator | $500 |
Stakers | $500 |
Protocol | $500 |
Lender | $500 |
Borrowers can prevent liquidation by increasing their collateral.
Interest Payments
When taking a loan, the borrower agrees to one of three interest payment options set by the lender:
interest + principal every term
interest every term
everything at the end
It is critical that interest payments are met. If the borrower is late, the loan will be flagged as liquidatible.
IMPORTANT: If the borrower is liquidated this way, regardless of their collateral ratio, the collateral will be divided by the parties set out in the above liquidation split.
It is worth noting liquidations should not be seen as a negative. This is a crucial part of any loan platform as it serves as a protection for the lender.
Having both vigilant individuals and bots performing this task will be a key aspect going forward. It is important users of the platform, especially borrowers, are active users keeping regular checks on their status and adding sufficient collateral where necessary.
In the event that the collateral value is lower than the 100% loan value, the lender is reimbursed all that has been liquidated. Only once the full loan amount has been recovered to the lender, do the interested parties (as above) split the remaining value.
