A BTC price rise across the threshold

The Solend-era Liquidations example illustrates a 20% loan repayment and a 5% bonus on the value repaid. These are the documented example’s terms, rather than a quotation of current reserve settings.

For this hypothetical comparison, assume one USDC collateral position valued at $12,875, an 80% collateral liquidation ratio, and one BTC debt position initially valued at $9885. Assume a BTC price rise increases the debt value to $10,485 while the USDC collateral value stays unchanged. Apply the documented example’s repayment and bonus terms, hold prices and the liquidation ratio fixed during liquidation, and exclude interest accrual between these snapshots. All monetary amounts below are US-dollar valuations.

The liquidation threshold is $12,875 multiplied by 80%, or $10,300. Initially, the $9885 debt sits $415 below that threshold. After the BTC price rise, the $10,485 debt exceeds it by $185, making the account eligible under these assumptions.

A liquidation repaying 20% of that debt settles $2097 worth of BTC. The 5% bonus on $2097 is $104.85, so the liquidation removes $2201.85 worth of USDC collateral in total.

The remaining collateral is worth $10,673.15, and the remaining debt is worth $8388. Applying the unchanged 80% ratio gives a new liquidation threshold of $8538.52. The remaining debt is therefore $150.52 below that threshold. A different bonus or repayment fraction changes the remaining balances; subsequent price movements or interest accrual can change eligibility again.

The liquidation threshold depends on the value and liquidation ratio of each collateral asset. With several collateral assets, their contributions determine the account’s combined threshold. Borrowing capacity uses loan-to-value ratios to limit new borrowing; liquidation eligibility uses the separate liquidation threshold.

Open full-size image

Oracle feeds provide the prices used to value supplied and borrowed assets. Save’s documentation describes Pyth and Switchboard, with the applicable feeds depending on reserve configuration. An incorrect oracle price can cause a wrongful liquidation. Accrued borrowing interest also increases debt, so an unchanged token price does not keep the borrow balance constant.

A liquidator repays the borrowed asset and receives collateral from the affected account. Both the debt and the collateral balance decrease. The extra collateral charged as a liquidation penalty reduces what remains to back the outstanding loan, which is why the account’s threshold must be recalculated after liquidation.

The penalty and the protocol’s share of that penalty are different quantities. The Solend-era Fees documentation describes a protocol share of 30% of the liquidation penalty that goes to the DAO treasury. That percentage applies to the penalty, not to the entire loan or collateral balance.

Open full-size image

Repaying debt

Voluntary repayment reduces the borrow balance. If collateral values and parameters remain unchanged, the collateral-based liquidation threshold stays unchanged.

Supplying eligible collateral

An additional eligible deposit can increase the liquidation threshold according to that asset’s value and liquidation ratio. The existing debt remains outstanding and continues to accrue borrowing interest.

The Parameters documentation describes Recovery Mode for heightened volatility or network congestion. During that mode, a contributor council can change parameters with greater flexibility. Those changes may lead to positions being forcibly closed by liquidators without a liquidation penalty.

Liquidation eligibility does not guarantee timely execution or full debt coverage. During market turmoil, collateral liquidation can leave a shortfall against the outstanding loan. That shortfall is bad debt.

Permissionless pool creators are responsible for ensuring that liquidators operate in their pools. The permissionless-pool documentation states that the protocol cannot compensate users in those pools for bad debt or wrongful liquidations. A pool’s liquidation arrangements and parameters therefore matter alongside the account’s displayed threshold.