A liquidation is a process that is triggered when a borrower's health factor goes below 1 due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other.
The Liquidation Process allows third parties to participate in the health of the overall protocol by acting in their own interest (to receive the discounted NFT) and as a result, ensure loans are sufficiently collateralized.
An intuitive way to understand liquidations is through a liquidation price.
If the asset goes below your liquidation price, your loan is considered unhealthy.
We can force
and see what
If we rename
we can obtain the general formula:
The NFT to be liquidated is put up for auction in Unlockd's Liquidation Marketplace with an Initial Bid, which is the maximum value between the outstanding debt (plus liquidation fee) and what the protocol could get if we immediately liquidated such NFT in one of the External Liquidation Pools.
The liquidation threshold is the percentage at which a position is defined as undercollateralised. For example, a Liquidation threshold of 80% means that if the value rises above 80% of the collateral, the position is undercollateralised and could be liquidated.
The delta between the LTV and the Liquidation Threshold is a safety mechanism in place for borrowers.
No. You will have a variable period of time to repay part of the loan (or the entire debt + interest) and 'save' it from liquidation. This is called the Borrower Grace Period (BGP), which is dynamic depending on the collateral price fluctuations.
However, if the NFT in liquidation is purchased at buyout price at any moment of the BGP, you will immediately lose ownership of the collateral and your loan will be liquidated.
For example, if the provided BGP is initially 48 hours, the Liquidation Auction will last 48 hours, but the actual period to repay the loan will be 47 hours and 45 minutes. If the price of the NFT drops suddenly and the BGP is readjusted to 24 hours, the Liquidation Auction will last 24 hours, but the actual period to repay the loan will be 23 hours and 45 minutes.
What if there are no bids in the Auction? What if the collateral can't be liquidated in any External Liquidation Pool? What if...?