Liquidation

Silo v1.1 uses full collateral liquidation which means if a position is signalled for liquidation, a liquidator may seize the borrower's entire collateral to repay outstanding debt.

What is Liquidation?

Liquidation is an event that may occur if a borrower's Health Factor reaches 0%.

When liquidation occurs, the borrower's collateral in the liquidation position is seized and sold to repay the outstanding loan. Borrowers will lose their collateral but may keep their borrowed tokens.

What is the Liquidation Process?

1. Health Factor reaches 0%

When a position's Health Factor reaches 0%, their position will be signalled for liquidation.

In the above scenario, if the $ETH price falls to $235.36, this position is vulnerable for liquidation.

2. Liquidators seize and sell collateral

Liquidators that seize collateral will sell it for the debt token.

In the above scenario, 0.1 $ETH will be seized and sold for $23.54 (0.1 * $235.36).

3. Liquidators repay loan and keep liquidation fee

Liquidators will use the proceeds of sale to repay the position's outstanding loan and will keep the difference between proceeds and loan as a liquidation fee.

In the above scenario, the liquidator will repay the $20 loan and keep $3.54.

4. Borrower keeps borrowed tokens

While the borrower has lost their collateral, their loan has been fully repaid which means they can keep their borrowed tokens.

In the above scenario, the borrower loses their 0.1 $ETH collateral but may keep the $20 they had borrowed.

Why is liquidation important?

If a lending market fails to liquidate positions and the price of a collateral token continues to decrease or the value of a loan token increases, a market may become undercollateralized. This may mean the market has accrued bad debt and lenders may lose some or all of their deposit.

Liquidation prevents insolvency from occurring by liquidating positions before this occurs to ensure lenders can withdraw the full value of their deposit.