Liquidations

This page is under construction.

When a borrower's Health Factor falls below 1 due to either a decrease in collateral value or an increase in borrowed debt, a liquidation process is triggered. During this process, any market maker or arbitrageur can repay a portion of the borrower's loan, up to a specified fraction known as the "Close Factor." In return, they receive the collateral at a discounted rate referred to as the "liquidation penalty." This mechanism ensures that loans are adequately collateralized, thus maintaining the solvency of the protocol and protecting lenders and the stability of the system.

Close Factor

The Close Factor represents the fraction of the borrower's loan that a liquidator can repay in a single transaction. Typically, this value is set at 50%, meaning a liquidator can repay up to half the borrowed amount in one go.

Liquidation Penalty

The liquidation penalty is a fee imposed on the price of collateral assets when liquidators acquire them after a loan surpasses the liquidation threshold. This fee incentivizes liquidators to repay loans and maintains the protocol's financial stability. Determined by protocol governance, this penalty varies for each asset depending on its volatility risk and liquidity.

The table below is under construction.

Asset	Liquidation Threshold	Close Factor	Liquidation Penalty
ETH	75%	50%	5%
OP	75%	50%	5%
ARB	75%	50%	5%
USDC	75%	50%	5%

Example:

Assuming Alice deposits 20 ETH and borrows 10 ETH worth of USDC. If Alice's Health Factor drops below 1, her loan becomes eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount, which in this case would be 5 ETH worth of USDC. In return, the liquidator can claim collateral, which is ETH, with a 5% bonus. Therefore, the liquidator would receive 5 ETH worth of USDC and 0.25 ETH as a bonus for repaying the 5 ETH worth of USDC.