Liquidations are a pivotal part of the PsyLend risk engine to maintain protocol health. Liquidation mechanisms are designed to take place before a loan is underwater to ensure that there is enough collateral in the pool for suppliers to withdraw.
Users are liquidated when their account health reaches their liquidation threshold. This information can be found in the account details section. When the white line reaches the red hazard sign, your account is open for liquidation.
Liquidation thresholds are calculated based on the largest minimum Collateralization Ratio (C-Ratio), or smallest Loan-to-Value Ratio (LTV) of any borrowed asset that the user has in their account. Note that C-Ratio is the inverse of the LTV. The thresholds for different assets can be found in the parameters section. Note that opening a new position can have serious consequences on borrowing power if the minimum C-Ratio of the new position is higher than any position the user currently has open!
When an account is eligible for liquidation, any third party liquidator will be able to repay any loan of their choice and seize any collateral asset of their choice in exchange. That is, liquidators do not have to repay the debt of any specific asset, it is at their sole discretion to choose which assets to seize and repay, as long as the account is restored to a healthy range! For example, if an account deposits SOL and ETH as collateral, then borrows BTC, and the price of SOL goes down significantly, the liquidator may opt to seize ETH instead of SOL when repaying the BTC debt.
Liquidators are economically incentivized only to liquidate enough assets to bring the account health back into a healthy range. Additionally, Liquidators will get a bonus for liquidating Vault Assets (10% of the total liquidated position) versus a standard token (5% of the total liquidated position).
To learn more about participating in liquidations, reach out on Discord.
- User A supplies $50 USDC and $50 of SOL-Call Vault Token . User A now borrows $50 of BTC (Min Collateral Ratio 150%) and $.00000001 of some other token (Min Collateral Ratio 200%)
- In this case, the larger of the two min collateral ratios are used to determine account Min Collateral Ratio of 200%. The value of the collateral is $100, so they can borrow $50 in total (100/50 = 200%)
- User A now borrows $50 of BTC, maxing out their min collateral ratio.
- The price of BTC increases by 10% to $55. The account is now below the Min Collateral Ratio threshold: 100/55 = 182%
- The liquidator would repay up to $10.53 in BTC. They would seize $11.06 in USDC or ETH, earning a net premium of $0.53 ~= 5% of $10.53.
- If the liquidator decides to take USDC, the user’s new position is $50-11.06 = $38.94 of USDC, $50 of SOL-Call Vault Token, and $55-10.53 = $44.47 in borrowed BTC. The Collateral Ratio is now 88.94/44.47 = 200%, so the account is now healthy again.