🌊Liquidations

How we handle negative equity & unhealthy accounts.

Introduction:

Any user that borrows tokens from LEND and creates a borrow balance. This borrow balance will then reflect on their account equity. As previously explained any borrow has to be overcollateralized. This means the user has to have a positive account equity, or in other words need to be supplying more tokens to the market than they are currently borrowing.

Having less supplied tokens than being borrowed means your account equity is negative. Any user that has their account equity go negative, will be subject to liquidation by other users of the LEND protocol that will return the user account liquidity back to positive territory.

What is Liquidation?

Liquidation is the process of returning an accounts unhealthy status by covering their bad debt. It is a process available via the LEND platform to maintain an efficient safe and sustainable environment for LENDERS. Liquidators are essentially repaying loans on unhealthy accounts to make the original lender whole again.

How a Liquidation Works:

USER A -> Supplies $BUSD Tokens to LEND

USER B -> Supplies any collateral -> Creates borrow balance of $BUSD

USER B's Supplied Collateral loses value -> Account equity is now negative

Liquidator steps in to repay the loan -> USER A remains 'whole'

Liquidator receives a bonus from USER B's original collateral.

When liquidations occur, the liquidator may choose to repay some or all of an outstanding borrow on behalf of the borrower, thus in return, will receive discounted amount of the collateral that is held by the borrower, this is the liquidation incentive.

Liquidators are able to close up to a predetermined fixed percentage of any outstanding borrow of underwater accounts. When collateral is seized by the liquidator, the liquidator is given tTokens, which they may redeem as if they had supplied the asset themselves. A user will have to approve each tToken contract prior to calling the liquidate contract (the borrowed asset which the user is repaying) as they will be transferring funds into the contract.

Liquidation Incentive

This is the additional collateral given to a liquidator as an incentive for liquidating underwater accounts on the platform. If the liquidation incentive is 1.2, the liquidators receive an additional 20% of the borrower’s collateral for every unit closed.