Liquidation

as of 02/01/2025

A Liquidation occurs when the value of a borrower’s loan exceeds the set Collateral Factor, a threshold designed to maintain a healthy balance between the loan amount and the collateral value. This situation typically arises when the market value of the collateral decreases, the loan value appreciates due to accruing interest, or the value of the borrowed asset increases relative to the collateral, causing an imbalance in the loan-to-collateral ratio.

When a loan becomes eligible for liquidation, liquidators can step in to repay part or all of the borrower’s outstanding debt. In return, they receive a portion of the borrower’s collateral at a discounted rate. This discount serves as an incentive for liquidators to monitor and act on loans that are at risk of defaulting.

During a liquidation event, only up to the Close Factor—which is variable but currently set to 50% for all assets—of the borrower's loan can be liquidated at one time. This partial liquidation approach is designed to reduce the impact on the borrower’s overall position, providing a more measured and manageable way to handle liquidation events.

The liquidation process is a crucial mechanism in lending protocols to manage risk and maintain the stability of the lending network. It prevents the accumulation of bad debt by ensuring that loans remain sufficiently collateralized. Without liquidation, a continued decline in collateral value could lead to a scenario where the protocol is unable to recover the full loan amount, resulting in bad debt for the system.

In the Hatom Protocol, all liquidations are carried out by automated bots, which can be programmed and operated by anyone interested in participating in the liquidation process. These bots continuously monitor loans and execute liquidations when the protocol conditions are met, specifically when a borrower's loan value exceeds the collateral factor.

Each liquidation incurs an 8% fee, deducted from the borrower's collateral value. This fee is part of the protocol’s design to manage liquidations and is automatically factored into the liquidation transaction. The system incentivizes liquidators' participation while ensuring the protocol remains stable and secure.

Example

A position where you have supplied $2,000 in USDC and borrowed $800 in EGLD is eligible for Liquidation when the collateral factor is exceeded, and the liquidation incentive is 8%.

In this case, a liquidator will pay up to $400 in EGLD (50% of the borrowed amount). In return, the liquidator will receive $432 worth of your USDC: $400 in USDC as repayment and $32 in USDC as the liquidation penalty.

However, the $32 USDC penalty is split between the protocol and the liquidator, meaning each party receives $16 USDC.

After the Liquidation, your new position will be:

• Supplied Value: $1,568 in USDC (reduced by the $432 paid to the liquidator)

• Borrowed Value: $400 in EGLD (since half of the loan was repaid)