Liquidations FAQ

What is a liquidation?

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.

Can you give me an example of how a liquidation could be triggered?

Sure!

Suppoose the price of a BAYC NFT is 100 ETH when you borrow 40 ETH instantly on Unlockd. Assume the Liquidation Threshold ($liqThreshold$ = $80\%$) in the protocol.

$BAYC\:\:NFT= \begin{cases} \text{Price} &100\:ETH\\ Borrow&40\: ETH \end{cases}$

If the price drops to 50 ETH, the Borrower Grace Period can be triggered since the Health Factor of your NFT-backed loan is below 1. Let's see why!

Remember that the Health Factor formula is:

$HF = \dfrac{valuation \cdot liqThreshold}{debt+interest}$

Therefore,

$HF = \dfrac{50\cdot 80\%}{40 + Interest} < 1$

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 $HF=1$ and see what $valuation$ is (assuming $interest = 0$):

$1 = \dfrac{valuation\cdot 0.8}{40+interest} \implies valuation = \dfrac{40+interest}{0.8} = \dfrac{40}{0.8} = 50ETH$

If we rename $valuation$ to $liqPx$ we can obtain the general formula:

$liqPx = \dfrac{debt+interest}{liqThreshold}$

What happens if my collateral gets liquidated?

In a liquidation event, the borrower permanently loses ownership of their NFT and the loan is terminated. Someone else will own the NFT.

How is the NFT liquidated?

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.

$bid_0 =max(debt+fees,\: ELP's)$

However, there are multiple possible scenarios as outcomes. Check this diagram to learn about all of them.

What is the liquidation threshold?

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.

Will my loan be liquidated if the price of ETH drops?

No. All NFTs are denominated in Ether instead of stablecoins on Unlockd. The price of Ether and the price of NFT are not necessarily related.

Will I be instantly liquidated if my Health Factor drops below 1?

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.

Does the Borrower Grace Period last exactly the same as the Liquidation Auction?

Not exactly. The real Borrower Grace Period ends 15 minutes earlier than calculated by our Risk Framework, leaving a margin of 15 minutes for the end of the Auction.

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.

Is the loan still accruing interest while the Borrower Grace Period takes place?

Yes, as the loan is still active and can be turned back to a safe state again if repaid.

What are the External Liquidation Pools?

External Liquidation Pools are third-party protocols that support Unlockd's Liquidation Process.

They allow for the liquidation of NFTs instantly, at a fixed price stipulated by them or the market. Currently, only liquidations via NFTX are available. Learn more here.

Can I participate in the Liquidation Auction?

Yes. Check this out:

How to liquidate

If I'm the highest bidder, how can I get the NFT?

In case you have placed a bid and won the Auction, you will be able to claim the NFT through the Claim option.

Learn more:

My Auctions

If my bid is not the highest one, do I need to claim my bid?

No. Your bid will automatically be refunded to your wallet in WETH.

What if there are no bids in the Auction? What if the collateral can't be liquidated in any External Liquidation Pool? What if...?

All possible scenarios have been considered and explained in our Liquidation Process.

Are there any transaction fees for independent Liquidators?

Currently, Unlockd doesn't charge any fee for transacting in the protocol.

If you still have questions or issues, feel free to reach the Unlockd team in the official Discord or Telegram channel.