Liquidation

Liquitable Account

The Risk Ratio and Leverage is the key metric used to assess the health of an account:

$$Risk Ratio = \frac{\sum_{i}{f_i\cdot abs(S_i -B_i)}}{S -B}$$

$$Leverage = \frac{S}{S -B}$$

When an account’s Risk Ratio or Leverage approaches the liquidation threshold, it becomes a liquitable account, indicating a heightened risk of liquidation. To lower the Risk Ratio, users can reduce their exposure to volatile assets. If leverage is the issue, decreasing the borrowed amount is the most effective way to stabilize the account.

The specific impact of these indicators on liquidation depends on the types of supplied and borrowed assets. However, when leverage is high, both the Risk Ratio and Leverage become more sensitive to changes in asset prices, requiring careful attention to avoid crossing the thresholds.

Liquidation Process

If an account becomes liquidatable, liquidators monitor and intervene by repaying part or all of the outstanding loan and taking ownership of the collateral (supplied asset). At this point, the liquidator can choose any collateral within the account to seize.

The extent of a partial liquidation is capped by the liquidation_close_ratio specified by each market, which limits how much of the position can be liquidated in a single event. This cap is designed to protect borrowers by preventing their positions from being entirely liquidated at once, giving them a chance to recover and stabilize their accounts.

Liquidator Bonus

Without timely liquidation, the collateral’s value could drop below the loan amount, leaving the protocol and lenders at risk of losses. The liquidator bonus rewards liquidators with an additional portion of the collateral(supplied asset) they seize when they intervene to liquidate a liquitable account. The bonus acts as a financial incentive for liquidators to act quickly, ensuring the lending pool’s health and preventing prolonged exposure to underwater positions.