Understanding Liquidations
A guide to liquidations on Tectonic
What are Liquidations?
Liquidations occur when a borrower's collateral decreases in value or the borrowed loan increases in value against the collateral. This will result in the user's Loan-to-Value (LTV) ratio reaching or exceeding the Liquidation Threshold. If this occurs, part of borrower's collateral is automatically sold to repay the loan and to restore it to a safe balance.
How do I know if I am close to being liquidated?
The best way to tell if you are close to being liquidated is to check the Lava Bar on your Dashboard. If the Lava Bar is full (i.e. 100%), your account is at risk of being liquidated. The maximum level on the lava bar that any user can borrow on Tectonic is 90%.
We would recommend for users to maintain their lava bar at around 50%, which could better protect your position during times of market volatility.
To reduce the amount of lava in the Lava Bar:
Make a loan repayment, or
Add more collateral to your account by depositing more assets.
Why do liquidations happen?
Liquidations are necessary to keep the Tectonic protocol solvent and healthy. They help Tectonic remove bad-debts, by paying off loans that have gone beyond its required Collateral Factor.
What the difference between current LTV, maximum LTV, Liquidation Threshold, and lava bar?
Current LTV (%): Your current LTV ratio is calculated by dividing the total amount borrowed by the total collateral in USD terms
Maximum LTV (%): The maximum LTV ratio determines the largest amount you can borrow based on your collateral in USD terms
Liquidation Threshold (%): If you reach or exceed this LTV ratio, your position will be flagged for liquidation. To avoid liquidation, keep your Current LTV below the Liquidation Threshold. You can do this by repaying your loans or adding more collateral
Lava bar: Total amount of Debt in USD / (sum(Amount of each collateral in USD * each collateral's respective Collateral factor))
To find your LTV ratios, click on the "Details" section in your Dashboard:
What happens during a liquidation?
When a liquidation is triggered (lava bar = 100%), the following events take place:
Liquidators will be able to liquidate a user's position up to the given asset's Close Factor in order to bring the loan back to a healthy level (i.e. as per the stipulated Collateral Factor)
The liquidator will receive a liquidation incentive. This incentive is taken from the liquidated user's collateral. The amount of collateral given is calculated at the collateral’s current market price plus a 10% liquidation fee
After the said loan amount is repaid, and if the loan account is now considered a healthy account (i.e. within the Collateral Ratio), it will be taken off the liquidation module
For more information on terminology, check out this section
Last updated