Liquidations & Liquidators
The Acumen liquidation page displays all loans that can be liquidated. Liquidations occur when a loan is undercollateralized, meaning the value of the borrower’s collateral does not cover the value of the loan. This can happen when the collateral decreases in value or the borrowed debt increase in value against each other. This collateral vs. loan value ratio is represented in the health factor.
The health factor can be defined as:
Since the health factor represents the overall health of the loan, when a loan's health factor falls below 1.0, it is liquidated to maintain solvency in the protocol.
When a loan is liquidated, 50% of the collateral is auctioned at a discounted price to repay a portion of the loan. Thus, third-party liquidators can seamlessly liquidate loans and buy the underlying asset at a discounted price. The amount the user receives depends on the liquidation bonus and what specific asset class the user is liquidating, as the liquidation bonus tends to differ amongst the asset class.
Example of A Liquidation:
Let's say that User 1 deposits 10 SOL and borrows 5 SOL worth of USDC. If the Users 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 SOL worth of USDC. In return, the liquidator can claim a single collateral which is SOL (10% bonus). The liquidator claims 2.5 + 0.25 SOL for repaying 2.5 SOL worth of USDC. Essentially, the user is being rewarded for maintaining solvency in the protocol. This incentivizes users to liquidate unhealthy loans from the ecosystem and prevents the protocol from default risk.
How to Avoid being liquidated:
In order to avoid liquidation, it is important to maintain your Health Factor a safe amount above 1. Users can increase their health factor by repaying a portion of the loan. In the near future, users will be able to add more collateral to their loans to increase their health factor. Still, the easiest way to maintain a healthy HF(health Factor) is to repay a portion of your loan. With our partnership with STEP, users will also be able to track these metrics from the STEP finance dapp, so stay tuned for that being released!
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