Liquidation

as of 17/06/2023

Liquidation is the process of repaying a borrower’s interest rate on their behalf in exchange for a fragment of their Collateral. Liquidators are incentivised to continuously look for loans eligible for liquidation to keep a lending network healthy and prevent bad debt.

How much is the Liquidation Penalty ?

A Liquidation penalty (or Liquidation Incentive) is a cut in price at which a liquidator receives a user’s collateral when completing a liquidation. This discount varies for each asset, encouraging liquidators to complete Liquidations to keep a healthy state.

You can find the Liquidation penalty of each asset by going to the "Markets" section and clicking on the asset.

Can you give me an example ?

The amount of a position that can be Liquidated at one time is set at 50% in the Hatom Protocol (the Close Factor), which means that only a fragment of the borrower’s debt is repaid and not all of it.

For example, a position where you have supplied $2,000 USDC and took a loan of $800 in EGLD is eligible for Liquidation. Suppose the Liquidation Incentive for USDC is 10%.

A Liquidator will come and pay on your behalf up to $400 in EGLD (50% of what you borrowed). In return, the Liquidator will get $440 of your USDC: $400 USDC + $40 USDC for the Liquidation Penalty.

Your new position after the Liquidation: Supplied Value - $1,560 in USDC, Borrowed Value - $400 EGLD.

How can I avoid getting Liquidated ?

To avoid getting Liquidated, the value of your Collateral has to be worth sufficiently more than your loan.

Here is some advice that can help you avoid getting liquidated:

• Try not to Borrow the maximum amount.

• Check on your position frequently to ensure it remains in good health.

• Use a Stablecoin in either the deposited or borrowed asset to reduce the number of variables you have to monitor.

• Preparing a repayment plan before taking a loan to be prepared for any scenario.

If you are still at risk of Liquidation after taking all the safety measures there are two things you can do:

• You can pay back your loan or a fragment of the amount you have borrowed.

• You can deposit more Collateral, thus decreasing your loan to value ratio.

Can I participate in the Liquidations Ecosystem ?

Anyone can participate in the Liquidation Ecosystem. It is a competitive market, and some liquidators even develop their solutions and bots to be the first to liquidate positions and receive the Liquidation Bonus.