📊Liquidations

What are liquidations?

The process of selling collateral and repaying debt to ensure that there is sufficient collateral to support the borrowed USDV of a vault is known as liquidation. Liquidations occur when someone other than the owner pays off part of the vault's debt and gets rewarded for it in the form of a collateral token.

Any vault with a collateral to debt ratio lower than the liquidation ratio may be partially liquidated. Based on the risk profile of the specific type of collateral, each vault type has its own liquidation ratio. This ensures that there is always sufficient collateral in the vaults to pay all outstanding debts.

What is the collateral to debt ratio?

The collateral to debt ratio is the ratio of the value of locked collateral in a vault to the debt owed by the vault. When we talk about collateral, we are referring to the tokens held in the vault as payment for the debt issued in USDV. To maintain a healthy protocol, there should always be sufficient collateral value to back the issued USDV. Vaults that fall below the minimum collateral to debt ratio, also known as the liquidation ratio, are subject to a liquidation penalty.

When creating a vault, users must maintain a minimum collateralization ratio, which is the value of the collateral relative to the amount borrowed. For example, if the required collateralization ratio is 150%, the value of the collateral must be at least 1.5 times the borrowed amount.

How does liquidation work?

Liquidators pay off 50% of a vault's debt and take back some of the blocked collateral tokens as compensation when vaults are below the liquidation ratio.

Liquidation vaults occur when the collateralization of the debt to collateral falls. If the liquidator has enough USDV, the liquidation process begins immediately.

There are two ways to initiate the liquidation process:

1) If the liquidator's address is on the whitelist, the liquidation will start immediately.

2) The only way to liquidate a vault without entering the whitelist is a delayed liquidation. Such a liquidation requires two separate transactions: first the planning and then the execution. At the same time, it should be noted that after scheduling, there are scenarios where the liquidation cannot be executed even after the delay has been reached. The main reason for this is that the vault is no longer unhealthy at the time of execution - it has been liquidated by someone else or the price of the token has increased.

Users must consider minDelay and maxDelay before delaying liquidation.

-> MinDelay sets the minimum delay before a liquidation is executed.

-> MaxDelay is a threshold after which a scheduled transaction will expire.

The liquidation process consists of multiple steps and is carried out by the project contracts, the only thing the user has to do is to interact with them:

A) The liquidator pays part of the vault's debt.

B) The liquidator receives a collateral for the amount of the debt that has been covered and an additional liquidator bonus.

You got liquidated, now what?

If the user's position is liquidated, he will be charged a liquidation penalty. The penalty will be calculated as a percentage of the outstanding debt that is liquidated and varies depending on the type of collateral used.

What is the penalty for getting liquidated?

To determine how much you have lost after liquidation, you need to examine the order in which the vaults are liquidated:

1) To restore your vault to a positive balance, the stablecoin debt must first be paid, which will be considered as a gain.

2) The second is the collateral, which is liquidated to pay the liquidators, which will be considered as a loss.

The liquidators will claim enough collateral to cover the debt they provided you with, adding an extra amount to boost their return on investment. It will be considered as lost collateral.

As a result, the amount of debt paid off has now been converted into an asset. Your penalty is the benefit of the repaid loan less the collateral you lost.