Liquidations
Last updated
Last updated
A liquidation is a process that occurs when a borrower's health factor goes below 1 due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other. This collateral vs loan value ratio is shown in the health factor:
In a liquidation, up to 50% of a borrower's debt is repaid and that value + liquidation fee is taken from the collateral available, so after a liquidation that amount liquidated from your debt is repaid. Ironclad offers partial liquidations.
A partial liquidation means that a liquidator can repay up to 50% of a user's debt instead of having to repay a user's entire debt. Meaning that someone with $1,000 in debt and a health factor < 1, could have $500 of their debt repaid in a single liquidation event.
The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral.
Sure! Here's two:
Example 1 Ironpa deposits 10 ETH and borrows 5 ETH worth of DAI. If Ironpa’s Health Factor drops below 1 his loan will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of DAI. In return, the liquidator can claim a single collateral which is ETH (5% bonus). The liquidator claims 2.5 + 0.125 ETH for repaying 2.5 ETH worth of DAI.
Example 2 (Partial Liquidation) Besty the cow deposits 5 ETH and 4 ETH worth of ONE, and borrows 5 ETH worth of DAI If Betsy’s Health Factor drops below 1 his loan will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of DAI. In return, the liquidator can claim a single collateral, as the liquidation bonus is higher for ONE(10%) than ETH (5%) the liquidator chooses to claim ONE. The liquidator claims 2.5 + 0.375 ETH worth of ONE for repaying 2.5 ETH worth of DAI.
To avoid liquidation you can raise your health factor by depositing more collateral assets or repaying part of your loan. By default, repayments increase your health factor more than deposits. Also, it's important to monitor your health factor and keep it high to avoid a liquidation. Keeping your health factor over 2, for example, gives you more of a margin to avoid a liquidation. You should be mindful of the stablecoin price fluctuations due to market conditions and how it might affect your health factor. For example, the market price of USDC 1.00 might not equal exactly USD 1.00, but for example USD 0.95. The price fluctuations of stablecoins, like any assets, affects your health factor.
When the position may be liquidated.
If you still have any questions, please reach out to the Ironclad team in our official .
