Understanding Liquidations

A guide to liquidations on Tectonic

What are liquidations?

Liquidations occur when the value of an account's collateral decreases in value or the borrowed loan increases in value against the collateral.

Liquidations happen whenever your Loan-to-Value (LTV) ratio reaches or exceeds your prevailing Liquidation Threshold.

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. When the Lava Bar is full (i.e. 100%), your account is at risk of being liquidated, so make sure it never gets there!

The maximum level on the lava bar that any user can borrow on Tectonic is 90%. However, 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.

That sounds harsh. 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: This is the LTV ratio that, when hit, will mean that your position has been 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:

The "Details" section can be found on the Dashboard

What happens during a liquidation?

When a liquidation event is triggered (lava bar = 100%), the following events take place:

1. 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)

2. 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

3. 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