Liquidation Process
Last updated
V1
Last updated
The stability and equilibrium of the lending and borrowing market in Unlockd rely on the "health" of collateralized positions within the protocol, as measured by the Health Factor. When an account's total loans have a health factor below 1, it triggers the initiation of the Liquidation Process, which occurs concurrently with the Borrower Grace Period.
The Liquidation Process introduces an opportunity for external parties to engage and participate in the overall health of the protocol. These third parties act in their own self-interest, seeking to acquire discounted NFT assets, while also playing a crucial role in ensuring that loans remain adequately collateralized. By participating in the Liquidation Process, these entities contribute to the maintenance of a healthy collateralization level for the protocol, preserving its overall integrity and stability.
Unlockd relies on its centralized and secure servers to ensure observability of loan statuses and trigger liquidation events. A specialized bot is designed to ingest on-chain data and perform these tasks effectively.
To align with the vision of decentralization, Unlockd has partnered with , a web3 decentralized back-end solution. This collaboration aims to enhance the robustness of the process by incorporating an on-chain safeguard.
The Gelato Network functions as a marketplace that brings together two key parties. On one side, there are developers seeking to automate transactions, while on the other side, infrastructure operators run executor bots that actively search for tasks to execute in exchange for a nominal fee. By leveraging Gelato's infrastructure, Unlockd can strengthen its operations and enhance the reliability of its on-chain processes. This partnership reinforces Unlockd's commitment to decentralized principles while maintaining a secure and efficient loan management system.
When a loan is triggered for liquidation through a Liquidation Trigger, the associated collateral is listed in the Unlockd Marketplace for auction. This auction presents an opportunity for interested parties to bid on the NFT being liquidated. Additionally, the Unlockd protocol provides an option for an immediate buyout.
In the Liquidation Marketplace, the NFT slated for liquidation is listed with an Initial Bid. This Initial Bid is determined based on the higher value between two factors. Firstly, it takes into account the outstanding debt on the loan, including any applicable liquidation fees. Secondly, it considers the potential value the protocol could receive if it were to promptly liquidate the NFT within one of the .
Initial Bid =
Borrowed Amount + Liquidation Fee
Maximum available amount in any of the , taking into account the impact to such pools of liquidating multiple collaterals.
In the case that the given NFT is not available to be liquidated in any External Liquidation Pool, then:
Initial Bid =
Simultaneously with the Borrower Grace Period (BGP), the Liquidation Auction commences. However, it is important to note that the BGP concludes 15 minutes prior to the start of the Auction. This intentional timing ensures that potential issues arising from delayed transactions, especially if the Borrower intends to repay at the last minute, are avoided. By concluding the Borrower Grace Period ahead of the Auction, any potential complications due to delays in transaction processing are mitigated.
This approach allows for a smoother transition from the grace period to the liquidation phase, providing clarity and maintaining the integrity of the auction process.
At the same time, the collateral NFT is offered for direct sale in the Liquidation Marketplace, with the buyout price being equal to the appraised price provided by Upshot.
If the NFT is instantly purchased at the buyout price, the loan is liquidated, and the Borrower loses ownership of the NFT permanently, even if the Borrower Grace Period still lasts.
Anyone can take part in an auction.
The bid must be no less than the starting price and higher than the current highest bid.
The bidder needs to deposit ETH to bid.
All active bids will remain in escrow until the auction ends or gets canceled.
The deposited ETH will automatically be refunded in wETH when their bid is not the highest bid.
FIRST BIDDER REWARD: The first bidder will receive a reward (bidFine) that is dynamic depending on the auctioned NFT price to incentivize bidding kickoff. The higher the price, the smaller the percentage received as a reward. This reward only applies if there is a second bidder (who pays the bidFine) or the Borrower repays the debt + bidFine to save the liquidation and cancel the auction.
The Borrower manages to recover the loan's Health Factor above 1 (by repaying totally or partly the debt or depositing more collateral) before the Auction ends or before the NFT is purchased for the buyout price. (All escrowed bids are returned to the bidders)
The NFT is purchased for the buyout price, even if the Borrower Grace Perioid still lasts. (All escrowed bids are returned to the bidders)
24 hours have passed without the Borrower recovering the Health Factor, and the NFT hasn't been purchased for the buyout price (See below)
In the third case, assuming the NFT hasn't been purchased at the buyout price, different scenarios may arise:
The highest bidder gets the collateral, its bid is used to repay the loan and the non-winning escrowed bids are returned to the bidders.
The collateral is immediately liquidated in the External Liquidation Pool that offers the highest amount, and all escrowed bids are returned to the bidders.
The highest bidder gets the collateral, its bid is used to repay the loan and the non-winning escrowed bids are returned to the bidders.
The collateral is immediately liquidated in the External Liquidation Pool that offers the highest amount, and all escrowed bids are returned to the bidders.
A Dutch Auction is started in the Liquidation Marketplace.
In this Dutch Auction, the starting bid is Borrowed Amount + Liquidation Fee, incrementally lowering the price until someone places a bid.
That first bid wins the auction, avoiding any bidding wars. This contrasts with the first Auction, where the price starts low and rises as multiple bidders compete to be the successful buyer.
The incrementally lowering keeps tending to 0 ETH if there are no bids.
A Dutch Auction is started in the Liquidation Marketplace.
In this Dutch Auction, the starting bid is Borrowed Amount + Liquidation Fee, incrementally lowering the price until someone places a bid.
That first bid wins the auction, avoiding any bidding wars. This contrasts with the first Auction, where the price starts low and rises as multiple bidders compete to be the successful buyer.
The incrementally lowering stops at the liquidation price in the External Liquidation Pool that offers the highest liquidation if there are no bids before.
It is an open-outcry ascending dynamic auction system that lasts for 15 more minutes than the duration of the , which is dynamic.
