Liquidations ​

Introduction ​

Liquidation is initiated when a borrower's health factor falls below 1, indicating that their collateral value inadequately covers the loan/debt value. This situation can arise from a decline in collateral value or an increase in the borrowed debt value relative to each other. During liquidation, up to 50% of the borrower's debt is settled, with that amount, along with a liquidation fee, being deducted from the available collateral. Consequently, the liquidation process ensures that the portion liquidated from the debt is repaid.

How much is the liquidation penalty? ​

The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral.

Can you give me an example? ​

Sure! A couple of them here:

Example 1 ​

Bob deposits 10 ETH and borrows 5 ETH worth of $HONEY. 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 $HONEY. 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 $HONEY.

Example 2 ​

Bob deposits 5 ETH and 4 ETH worth of BTC, and borrows 5 ETH worth of $HONEY. 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 $HONEY. In return, the liquidator can claim a single collateral, as the liquidation bonus is higher for BTC (15%) than ETH (5%) the liquidator chooses to claim BTC. The liquidator claims 2.5 + 0.375 ETH worth of BTC for repaying 2.5 ETH worth of $HONEY.

How can I avoid getting liquidated? ​

To steer clear of liquidation, you can boost your health factor by adding more collateral or paying back some of your loan. Repaying does a bit more to help your health factor than just depositing. It's crucial to keep an eye on your health factor and try to keep it above 2, as this gives you more safety from liquidation. Pay attention to stablecoin prices—they might not always match the expected value due to market changes, and this can affect your health factor. For instance, if the market price of ETH is $2000.00, it might be a bit lower, like $1998.95. These changes in stablecoin prices, like any asset, impact your health factor.

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. You can find more details in the developers liquidation section.