> For the complete documentation index, see [llms.txt](https://docs.usdv.com/usdv/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.usdv.com/usdv/usdv-explained/liquidations/liquidation-principal.md).

# Liquidation Principal

If the amount of collateral in the vault drops below the minimum collateral ratio, the algorithm will indicate a 50% cover and will reward you with an additional 10% of coverage.

***EXAMPLE***: User deposits 0.04 BTC ≈ $900 to borrow 300 USDV at a minimum collateral level of 150%. If the collateral level drops below 150%, the vault becomes undercollateralized. After that, a smart contract launches a liquidation process. In this case, USDV protocol will offer to redeem 50% of the loan with a 10% bonus fee. Any user can repay 150 USDV loan (50% of 300 USDV loan) and get back 150 USD and 15 USD collateral (10%) as bonus fee in BTC. After all these operations the vault becomes overcollateralized again.

Let's take a closer look at each stage:

***Stage #1*** 

* User deposits 0.040 BTC ($900) and borrows 300 USDV;
* In such a case, the collateralization ratio is 300%.
* The liquidation happens when the price of BTC/USD goes down and the collateral ratio drops below 150%;
* In this example, the liquidation value is $450.

<figure><img src="https://977384663-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Fpr7SGqXtQCtvndTIOAzx%2Fuploads%2FaNoSakeUkPMPr252eDnU%2Fimage.png?alt=media&amp;token=82c67c20-b74a-414c-b9d7-820292eb1473" alt=""><figcaption><p>Stage #1</p></figcaption></figure>

***Stage #2***

* The BTC/USD exchange rate declined. As a result, the collateral value drops to $400/0.040 BTC;
* The collateralization ratio dropped to 133.3%, which is lower than the minimum collateralization ratio of 150%;
* The vault has to be liquidated.

<figure><img src="https://977384663-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Fpr7SGqXtQCtvndTIOAzx%2Fuploads%2FAGXb4kDy0cabWJwEBFtV%2Fimage.png?alt=media&amp;token=78f44545-8c4a-48e4-9337-cf0b3881d43f" alt=""><figcaption><p>Stage #2</p></figcaption></figure>

***Stage #3***

* At this point, the liquidation process has started;
* 50% of the debt (150 USDV) is being liquidated;
* Collateral decreased by 0,01665 BTC (debt + reward for liquidator + system fee)

<figure><img src="https://977384663-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Fpr7SGqXtQCtvndTIOAzx%2Fuploads%2FTx8oEEIR6IG2DO1dgqel%2F6.3.png?alt=media&amp;token=3fe0ab41-0393-46c4-91c6-ccedffe51d06" alt=""><figcaption><p>Stage #3</p></figcaption></figure>

***Stage #4***

* The liquidation process is now complete;
* 50% of the debt was liquidated (150 USDV remained);
* The remaining collateral is 0.02335 BTC ($233);
* Collateral ratio increased to 155.6 percent.

<figure><img src="https://977384663-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Fpr7SGqXtQCtvndTIOAzx%2Fuploads%2FizMxWVyLSupnsL1nGEKh%2F6.4.png?alt=media&amp;token=f31f6343-81ca-4509-9915-5b42d033d3cd" alt=""><figcaption><p>Stage #4</p></figcaption></figure>