Liquidations
Liquidation is triggered when a borrower’s collateral value does not properly cover their loan. Liquidation will occur when the value of collateral decreases or when the value of borrowed debt increases against the collateral.
Liquidation Risk
When a user-account's borrowUtilization
reaches liquidation threshold (100%), its position will be liquidated.
borrowLimit: (USD value)fo
r each market the user account has entered into, supplied balance is multiplied by the market’s collateral factor, summed.
borrowBalance: (USD value)
assets borrowed from each market, summed.
borrowUtilization : borrowBalance/borrowLimit
A user account's Borrow Limit represents its USD value borrowable, before it reaches liquidation. Liquidation happens when its Borrow Utilization reaches 100%. After a user account is subject to liquidation, it can’t withdraw or borrow assets.
Liquidation Incentive
closeFactor
is the percentage of a liquidatable account’s borrow that can be repaid in a single liquidate transaction. If a user has multiple borrowed assets, the closeFactor applies to any single borrowed asset, not the aggregated value of a user’s outstanding borrowing.
Forlend's closeFactor (at launch) is 30%, when the assets are liquidated, there is also a 5% liquidationIncentive to the liquidator.
Let's use the following scnario as an example:
Alice deposits $10,000 worth of FRA tokens as collateral and borrowed $8,000 worth of Bitcoin. (LTV ratio = 80%)
$BTC price raises 6.69%, borrowUtilization exceeds liquidation threshold (100%). Liquidation is triggered.
A liquidation bot executes the liquidation (by repaying BTC and getting FRA tokens). Alice's position after liquidation:
Alice supplied asset: $10,000 - $10,000 * 30% (liquidation factor) - $10,000 * 30% * 5% (liquidation incentive) = $6,850
Alice borrowed assset: $8,000 - $3,000 = $5,000
Alice borrowUtilization: $5,000 / $6,850 is less than liquidation threshold (100%).
Liquidation bot earns: $3,000 - ($10,000 * 30% (liquidation factor) - $10,000 * 30% * 5% ) = $150.
If Alice's supply position inludes more than one asset type and liquidation is triggered, a liquidation bot will start liquidating from the asset type with the highest valuation. Liquidation can be repeatedly triggered until Borrow Utilization is under 100%.
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