Liquidations

Introduction

A liquidation is a process that occurs when a borrower's health factor goes below 1 due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other. This collateral vs loan value ratio is shown in the health factor. In a liquidation, up to 50% of a borrower's debt is repaid and that value + liquidation fee is taken from the collateral available, so after a liquidation that amount liquidated from your debt is repaid.

How much is the liquidation penalty?

The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral. You can find every assets' liquidation fee in the risk parameters section.

Can you give me an example?

Sure! A couple of them here:

Example 1 Bob deposits 10 CFX and borrows 5 CFX worth of USDT. 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 CFX worth of USDT. In return, the liquidator can claim a single collateral which is CFX (5% bonus). The liquidator claims 2.5 + 0.125 CFX for repaying 2.5 CFX worth of USDT.

Example 2 Bob deposits 5 CFX and 4 CFX worth of ETH, and borrows 5 CFX worth of USDT. 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 CFX worth of USDT. In return, the liquidator can claim a single collateral, as the liquidation bonus is higher for ETH (15%) than CFX (5%) the liquidator chooses to claim ETH. The liquidator claims 2.5 + 0.375 CFX worth of ETH for repaying 2.5 CFX worth of USDT.

How can I avoid getting liquidated?

To avoid liquidation you can raise your health factor by depositing more collateral assets or repaying part of your loan. By default, repayments increase your health factor more than deposits. Also, it's important to monitor your health factor and keep it high to avoid a liquidation. Keeping your health factor over 2, for example, gives you more of a margin to avoid a liquidation. You should be mindful of the stablecoin price fluctuations due to market conditions and how it might affect your health factor. For example, the market price of USDC 1.00 might not equal exactly USD 1.00, but for example USD 0.95. The price fluctuations of stablecoins, like any assets, affects your health factor.