🌊Liquidations

A critical process in protecting pool lenders, which is triggered when a borrower's health factor falls below 100% due to their collateral value not adequately covering their loan or debt value.

This might happen when the collateral decreases in value, or the borrowed debt increases in value relative to each other. This collateral-to-loan value ratio is reflected in the health factor, based on the account's margin determined by the liquidation threshold (LT) of each collateral asset.

Liquidations are triggered by Oracle price feeds and managed by liquidator bots ran internally and by third parties. A liquidation penalty is applied to the value of the collateral during liquidation, serving as an incentive to execute the liquidation. A portion of the seized collateral goes to liquidator incentives.

If during a liquidation the quoted value of borrowers collateral is unable to fully be recovered, bad debt may accrue. This may be due to insufficient liquidity. Accrued bad debt will be socialized among all lenders to the pool.

Liquidations are open source and permissionless. Visit Running a Liquidator Bot to learn more.