Liquidations
Liquidation is a critical risk management process in Intersect that helps maintain the protocol's solvency and protects lenders. It occurs when a borrower's position becomes undercollateralized, typically when their health factor drops below 1.
What Triggers a Liquidation?
A liquidation can be triggered when:
The value of the collateral decreases
The value of the borrowed assets increases
Accumulated interest causes the debt to exceed safe ratios
The health factor is a key metric that represents the safety of your borrowed position relative to your collateral.
How Liquidations Work in Intersect
When a position becomes eligible for liquidation:
Liquidators can repay up to 50% of the outstanding borrowed amount in a single asset.
In return, they receive a portion of the collateral, including a liquidation bonus.
The liquidation bonus varies by asset and can be found in the risk parameters section for each asset.
Liquidation in Practice: An Example
Let's consider an example:
Alice deposits 10 ETH and borrows 5000 USDC. If Alice's health factor drops below 1, her position becomes eligible for liquidation. A liquidator can then:
Repay up to 2500 USDC (50% of the borrowed amount)
Receive ETH from Alice's collateral, including the liquidation bonus
If the liquidation bonus for ETH is 10%, the liquidator would receive ETH equivalent to 2750 USDC (2500 USDC repaid + 250 USDC bonus).
Close Factor
The Close Factor is a crucial parameter in Intersect's liquidation process. It determines the maximum portion of a borrower's debt that can be repaid in a single liquidation event. Understanding the Close Factor is essential for both borrowers and potential liquidators.
Key points about the Close Factor:
Definition: The Close Factor represents the maximum percentage of a borrower's current borrowed value that can be repaid in a single liquidation transaction.
Dynamic Nature: The Close Factor is not fixed but scales dynamically based on the borrower's position:
It starts at a Minimum Close Factor when the Borrowed Value just passes the Liquidation Threshold.
It increases linearly up to 1.0 (100%) as the Borrowed Value approaches a Critical Borrowed Value.
Minimum Close Factor: In Intersect, the Minimum Close Factor is set to 0.1 (10%). This means that when a position first becomes eligible for liquidation, at least 10% of the borrowed amount can be repaid.
Critical Borrowed Value: This is the point at which the Close Factor reaches 1.0, allowing for full liquidation. It's calculated based on the Collateral Value, Liquidation Threshold, and a Complete Liquidation Threshold parameter.
Complete Liquidation Threshold: This parameter (set to 0.7 or 70% in the protocol) determines how far between the Liquidation Threshold and Collateral Value a borrower's position must deteriorate to allow full liquidation.
Small Positions: For very small positions that are eligible for liquidation, the Close Factor is always 1.0, allowing for complete liquidation in one transaction.
Governance Control: The Minimum Close Factor, Liquidation Thresholds (which vary by asset), and Complete Liquidation Threshold are parameters that can be adjusted through protocol governance.
Implications for Users
For Borrowers: As your position's health deteriorates, a larger portion of your debt becomes eligible for liquidation in a single transaction. This incentivizes maintaining a healthy collateralization ratio to avoid substantial liquidations.
For Liquidators: The amount you can liquidate in a single transaction depends on how undercollateralized the borrower's position is. Positions far below the liquidation threshold may be fully liquidatable in one transaction.
Understanding the Close Factor mechanism helps users better manage their risk and understand the potential implications of market movements on their borrowed positions.
To protect your position from liquidation:
Monitor Your Health Factor: Keep your health factor well above 1. A higher health factor provides a larger safety margin.
Add Collateral: Deposit additional assets to increase your collateralization ratio.
Repay Debt: Reducing your borrowed amount will improve your health factor.
Use Risk Management Tools: Consider using tools that can help monitor your position and alert you to potential risks.
Be Aware of Market Volatility: Pay attention to price fluctuations, especially for volatile assets or stablecoins that may depeg.
Participating in Liquidations
Liquidations on Intersect are open to all participants, but be aware:
The liquidation market is highly competitive.
Most successful liquidators use automated systems and bots.
Participating effectively requires technical knowledge and quick reaction times.
For those interested in becoming liquidators, refer to our developer documentation for more detailed information.
Remember, while liquidations are a necessary part of maintaining a healthy lending protocol, they can result in significant losses for borrowers. Always borrow responsibly and maintain a safe collateralization ratio.
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