Liquidation Process
The liquidation process in Folks Finance ensures the stability and security of the protocol by managing under-collateralized loans. This process involves third parties who liquidate these loans, receiving incentives for maintaining protocol health.
Key Concepts
Triggering Liquidation:
Liquidation occurs when the total borrowed amount exceeds the borrowable amount.
Formula:
Where:
is the total borrowed amount at time t.
is the borrowable amount at time t.
Liquidation Bonus:
Liquidators receive a bonus for repaying the under-collateralized position.
Example: A liquidation bonus of 10% means that if $50 is repaid, $55 worth of collateral is seized.
Formula:
Where:
is the amount of the borrowed asset being repaid.
is the conversion formula from borrow to collateral.
is the liquidation bonus percentage.
Borrow to Collateral Conversion (BtoC):
Converts the amount of borrowed assets to the amount of collateral seized.
Formula:
Where:
is the price of the borrowed asset.
is the price of the collateral asset.
Liquidation Fees:
A portion of the liquidation bonus is retained by the protocol as revenue.
Example: With a liquidation fee of 20%, if the collateral seized is $55, the protocol retains $1 as revenue.
Formula:
Where:
is the liquidation fee retained by the protocol.
is the bonus portion of the collateral seized.
is the liquidation fee percentage.
Remaining Collateral:
The remaining collateral after the liquidation fee is retained by the liquidator.
Formula:
Where:
is the remaining collateral retained by the liquidator.
Detailed Steps in Liquidation Process
Identifying Under-Collateralization:
The protocol continuously monitors loans to identify when the total borrowed amount exceeds the borrowable amount .
Once identified, the loan becomes eligible for liquidation by third parties.
Executing Liquidation:
A third party, referred to as the liquidator, selects a specific borrow to repay and a specific collateral to seize.
The liquidator repays the amount of the borrowed asset and receives the corresponding collateral, plus the liquidation bonus.
Formula:
Incentivizing Liquidation:
To incentivize third parties to perform liquidations, they receive a bonus on the collateral seized.
The liquidation bonus ensures that liquidators are compensated for maintaining the health of the protocol.
Calculating and Distributing Liquidation Fees:
A portion of the collateral seized as a bonus is retained by the protocol as a liquidation fee.
Formula:
The remaining collateral after deducting the liquidation fee is kept by the liquidator.
Post-Liquidation:
The liquidator retains the net collateral after fees.
Formula:
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