Liquidation

Ensuring the stability of the protocol by averting bad debts is a primary concern. Bad debts can arise when a borrower's repayment of a loan becomes unviable, meaning that the collateral placed to secure the loan is valued lower than the loan itself. This situation can only occur due to drastic changes in the valuation of assets used as collateral or borrowed, resulting in losses incurred by lenders, leading to a loss of reputation and confidence from users. The protocol is armed with mechanisms to prevent such situations, and one of them is the loan liquidation system.

Understanding Liquidation

Liquidation is a critical process aimed at mitigating the risk of bad debts. When a user's Health Factor falls below 1, it signifies inadequate management of collateral and debt, rendering their position excessively risky. In such instances, the protocol permits any party to settle the user's debt and claim their collateral. The value of the seized collateral equals the repaid debt value plus a liquidation penalty fee.

Liquidation Penalty Fees

A liquidation penalty fee must be taken during the liquidation process to incentivize actors to make liquidation. The liquidation fee is specified for each asset in the Market Rules.

How to become a liquidator?

To become a liquidator you need to observe the state of the protocol. Whenever you find that the Health Factor of any user is below one you can perform a liquidation by calling the "liquidate" function.