Maximum Liquidation and Repayment Amount
Determining the maximum amount for liquidation and loan repayment
When users supply assets as collateral and borrow against them, the assets supplied as collateral are at risk of being liquidated, or sold off in order to cover the borrower’s debts and ensure the protocol remains solvent.
The maximum amount that can be liquidated is the maximum amount of collateral that can be liquidated to repay the outstanding debt, in a liquidation event.
It is determined by:
When the Health Factor falls below a certain threshold (the Liquidation Threshold), the CDP module will automatically initiate a liquidation, afterwhich the collateral is sold at a discount to incentivize liquidators to repay the outstanding debt.
To determine the maximum amount that can be liquidated, the borrower's debt is multiplied by the Close Factor; This gives the maximum amount of collateral that can be liquidated.
A borrower provides $100,000 in USDC and borrows $85,000 in ATOM (max LTV).
The value of the borrowed ATOM increases to $92,500, bringing the user’s LTV ratio to 95.2% (thus exceeding the Liquidation Threshold of 88%).
The borrower will be liquidated in order to ensure their position remains over-collateralized.
The Critical Borrowed Value is defined as:
B = LT + (CV-LT) * CLT, where
- B = Critical Borrowed Value;
- CV = Collateral Value;
- LT = Liquidation Threshold;
- CLT = Complete Liquidation Threshold; CLT determines how far between LT and CV a borrower’s borrowed value must have progressed in order to allow a full liquidation. For example, 0.3 indicates 30% of the way from LT to CV.
The exact calculation is as follows:
- 1.Find Close Factor
Critical Borrowed Value (B)
= LT + (CV-LT) * CLT
= $88,000 + ($100,000 - $88,000) * 0.7
Close Factor = 1 when Borrowed Value hits the critical amount of $96,400.
Close Factor (CF)
= (Debt - LT) / (CV - LT) * (1 - Minimum CF) + Minimum CF
= (92,500 - 88,000) / (100,000-88,000) * (1-0.1) + 0.1
Relationship between Close Factor and Borrow Value
- 2.Calculate Maximum Liquidation Amount
Maximum amount that can be liquidated
= Close Factor * Debt (i.e. Current value of borrowings in USD)
= 0.4375 * $92,500
The maximum amount that can be liquidated is $40468.75. The liquidator can initiate a liquidation and sell up to $40468.75 in collateral to repay the outstanding debt.
In return, the liquidator should expect to receive $40,468.75 * 1.045 = $42289.84 worth of the collateral after repaying the debt.