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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.
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.
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.
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:
- 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.
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.
Last modified 3mo ago