Example of Borrowing and Liquidation
Continuing the previous illustration, instead of redeeming his USDC, John decided to use the asset as collateral to borrow CRO
- 1.John pledges his 5,000 USDC, and with a collateralization ratio of 75%, he can borrow up to 25,000 CRO at the prevailing exchange rate (0.15 USDC per 1 CRO)
- 2.John decides to only borrow 12,500 CRO (a collateralization ratio of 50%)
- 3.In 3 months time, assuming a borrowing APY of 12% and constant USDC/CRO exchange rate, John will need to pay back his original balance and its accrued interest to the total of ~12,875 CRO
- 4.If during the borrowing period, the value of CRO to USDC increases as such that John’s collateralization ratio goes beyond 75%, a liquidation event will occur to a portion of the borrowing in order to bring back the collateralization ratio to below 75%.