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.
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.
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)
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.
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