# 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="/files/8d9ya2bMYjTdjgUvz3bM" 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="/files/YuXTVVZJfnekV54oX1eV" 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="/files/W6eLQODXklNggDAM5QSC" 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="/files/8O5Ipl6LOz8GooLu84cc" alt=""><figcaption><p>Stage #4</p></figcaption></figure>


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