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. 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.

Can you give me an example?

Sure! A couple of them here:

Example 1 Peter deposits 10 ETH and borrows 5 ETH worth of USDO. If Peter’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 USDO. 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 USDO.

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

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 healthfactor. For example, the market price of USDO 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 healthfactor.